QLAC Annuities: Securing Your Retirement with Guaranteed Income

Investors buy most annuities by paying for them over time or with a lump sum of cash, but QLAC annuities are purchased specifically with a chunk of existing retirement savings, such as money from your 401(k) plan.

QLAC annuities pay out late in retirement and provide a financial hedge against outliving your savings if you have a long retirement. Another advantage of a QLAC annuity is that it can allow you to delay required minimum distributions, or RMDs, up until you turn 85.

You can use a portion of your qualified retirement savings to purchase a QLAC that will annuitize later in your retirement. Then, you do not have to worry about RMDs on that money until the contract annuitizes, which can provide you with a fresh stream of income.

Like other types of annuities, that stream of payments is guaranteed and will last for the rest of your life, even if it eventually exceeds the principal.

One of the primary benefits of opting for a QLAC annuity is the ability to delay RMDs with the money invested into the product. It is also a potential option for people who do not want to take on much retirement savings risk.

A QLAC annuity is a conservative option that has few risks attached. When you invest money into a QLAC, you protect it from the volatility of the stock market that affects other annuity products.

Another benefit of a QLAC annuity is the creation of guaranteed payments. Once the payout from the annuity starts, the payments last throughout the rest of your life.

As with many financial products, QLAC annuities are not always safe. For one, the money you place into one can be difficult or even impossible to access after you have purchased the QLAC. It could be a risky investment if you later run into some sort of financial emergency and need access to those funds.

If your retirement goals do not match with the advantages of a QLAC annuity, then it may not make sense for you as a purchase. QLAC annuities can be helpful to conservative investors who are retiring late or looking to potentially take advantage of a lower tax bracket.

QLAC annuities are not savings accounts but rather financial products sold by private companies. If you are considering investing in one, be sure to deal with a reputable company.

Annuities are not FDIC-insured, so selecting a provider with a strong financial standing and a track record of stability can help lessen your risk. You can assess the health of the annuity issuer with credit ratings from agencies such as A.M. Best, Moody’s, Fitch or Standard & Poor’s.

There are also limits on how much money you can place into a QLAC. Because the investment protects against outliving your savings, it makes little sense to place most or all of your retirement savings into this product. The most money you can invest into a QLAC annuity is $210,000.

When looking to invest in a QLAC, it can also make sense to double-check that the investment makes sense. Talking to a qualified financial advisor may help ease any doubts about whether a QLAC is right for you.

There are a few key differences between QLACs and other types of annuities. The biggest difference may be how they are funded.

A QLAC is a deferred annuity, but it is funded directly from your existing retirement savings. Other types of annuities do not have to be directly funded from something like a 401(k) or IRA.

Other types of annuities may also pay out earlier in retirement. Immediate annuities usually pay out when you first invest in them. However, QLAC annuities do not pay out until late in retirement, offering built-in security that you do not have to worry about outliving.

QLAC annuities can be safer investments than other types of annuities because they protect against the swings in the market once invested. Variable annuities, for example, fluctuate heavily with economic performance.

QLAC annuities may not make sense if you have serious health conditions or do not expect to live late into retirement. The great advantage of these products is their ability to provide income for those who could exhaust their savings.

If you have a history of long lifespans in your family or are perfectly healthy late into life, a QLAC annuity could be an option for you to consider. Those who are risk-averse also make suitable candidates for QLAC annuities. The products provide security with little additional risk.

However, it may not make sense to invest a significant chunk of your 401(k) or IRA into a QLAC annuity if you are unlikely to live long enough to receive payouts.

Writer Lena Borrelli contributed to this article.