Photo Illustration: Ericka Burchett/The Wall Street Journal
Millions of Americans have good reason to worry they will outlive their retirement savings. A little known tax-advantaged annuity can help avoid that, providing a guaranteed income in the final years of life.
Starting this year, Americans can use up to $200,000 of their retirement accounts to purchase qualified longevity annuity contracts, or QLACs. The new contribution limit, set by Congress, is up from $145,000 or 25% of your balance, whichever was lower.
An annuity is an insurance contract that you can buy to provide a steady income like a pension, making it easier to plan for the uncertainty of life expectancy. QLACs have existed for a decade and offer significantly more income for life than a typical immediate annuity, since the payments don’t start until later in life, at, say, age 80 or 85. They also have a special tax benefit.
The shift from the security of pensions to relying on 401(k)s turned workers into both investors and actuaries, tasked with building a nest egg big enough to last their lifespan. QLACs are a way to remove some of that guesswork.
“More people should be able to take advantage,” said Mark Iwry, a former Treasury Department adviser who helped create QLACs, in 2014.
Reducing the balance of your retirement savings cuts down the size of the required taxable withdrawals retirees have to take starting at age 73.
The drawbacks to a QLAC are the upfront cost and that if an emergency occurs and you need money before the beginning of payouts, you can’t touch it. It is locked in. The size of the payout also depends on how long you live.
Charlie and Gloria Walker are banking on a qualified longevity annuity contract for security after age 85.
Photo: The Walker Family
Charlie Walker, of Basking Ridge, N.J., got a QLAC to help cut the taxes from his annual distributions and to ensure his wife, Gloria, has a partial replacement for his
pension, which lasts for his life only, if he dies first. “We figure that she’s going to outlive me,” Walker said, noting that his wife’s grandmothers lived to their 90s.
Last December, when he was 79 and she was 76, they bought a $108,000 QLAC with money from his individual retirement account, choosing the option that the payouts would continue for both of their lives. The payouts of nearly $16,000 a year start when he turns 85. He’ll avoid more than $20,000 in taxable distributions from the IRA over the next few years.
They chose a lower payout for a death benefit. If they both die before the payouts reach $108,000, their four daughters get the difference.
How longevity annuities work
With a QLAC, savers hand over money from their retirement account to an insurer near the start of retirement, at, say, age 65. The insurer in turn will agree to pay you a set annual amount for life, starting a decade or two in the future.
A 65-year-old could buy a $200,000 QLAC without a death benefit that would start monthly payouts of $11,175 at age 85, according to
That is $134,100 of payouts in the first year. A 75-year-old would get just over $7,000 a month, about $84,000 in the first year.
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In the simplest version of a QLAC, payouts stop when you die or a spouse dies, and the insurance company keeps any money left over. Most contracts have a death benefit provision that lets heirs recoup the purchase price minus any payouts made.
Adding a death benefit to the annuity reduces the monthly payouts to about $8,700 for the 65-year-old and $5,200 for the 75-year-old, MetLife said. The longer the deferral, the bigger the payouts.
You’re paying to insure yourself from outliving your retirement savings, Iwry said.
Annual payouts from a QLAC count as taxable income, but there are some tax advantages. Since the money directed to the annuity is no longer in the retirement account, retirees don’t need to withdraw as much from their savings each year when required minimum distributions begin at age 73. If you have a $1 million retirement account and buy a $200,000 QLAC, your RMDs will be based on the $800,000 balance.
Where to purchase a QLAC
The two ways to get a QLAC are through your company retirement plan, when the option is available, or on the individual market through a financial planner, insurance agent or brokerage. Fidelity, for example, offers them directly to investors with IRAs through a marketplace of five insurers.
QLACs are still a niche insurance product. Sales were $234 million in 2022, but the market for this option is considerably larger. Americans have $22.3 trillion in retirement accounts, according to the Investment Company Institute.
People tend to underestimate their lifespan when planning for the future, advisers said. A 65-year-old woman today who is a nonsmoker and in excellent health has a 54% chance of living to 90, a 31% chance of living to 95 and a 13% of living to 100, according to the Actuaries Longevity Illustrator.
Some retirees assume they can do better investing the money on their own, said Walter Pardo, a wealth adviser in Liberty Corner, N.J. The point is, you are transferring the market risk to the insurer, he said. The security of that fixed-income backstop lets you invest your other assets more aggressively in Roth IRAs or taxable accounts, potentially leaving a tax-free legacy to your heirs.
If you’re healthy and won’t need all your required distributions at the start of retirement, QLACs can be a good bet, especially for women, Pardo said.
“Guys who say, ‘I could take the $200,000 and put it in Google,’ don’t see the value of the cash flow that this is going to provide for life,” he said.
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