QLACs may allay fears of dying ‘dead broke’

The Bakersfield Californian
July 16, 2015

A client came into my office the other day. She was so excited about telling me an “amazing” story, which she somehow thought validated her long-disputed retirement plan.

It seems her sister worked for an old country doctor in rural Kansas. Although the doctor was well into his 80s, he had no intention of retiring and closing his medical practice. In fact, he would point to the mortuary across the street from his office and laughingly tell his staff that when he died on the job, take him there.

Just a few days ago, the local newspaper published a big story about how the doctor was celebrating his 60th year of practicing medicine in the town. It was a lovely article. I know, because my client kept waving it in my face.

The night the article published, the good doctor locked the door to his office, went home to have dinner with his wife and crawled into bed. He died in his sleep that night, still basking in the accolades that most of us would have written — if we are lucky — only in our obituaries. He was 87 years old.

“See, he did it. He didnt want to retire. He just kept working,” my client shouted. “I can do that, too.”

I agreed that it was truly an “amazing” storybook ending to the man’s rewarding life and career. “But I will be more amazed if you or anyone would be ’lucky enough’ to skid to life’s finish line still working and without the need for a retirement plan.”

Being able to work into our 70s and 80s boils down to luck. Who can predict the illnesses we will encounter? And unless we are self-employed, the decision to keep working may not be our own. We may not be able or willing to keep up with workplace demands.

No matter what our dream may be, we still need to plan on how to support ourselves through 10, 20 or 30 years of non-working retirement. Our biggest fear is that no matter how much we save, we could outlive our money.

This is a realistic fear. According to a recent study by the Employee Benefit Research Institute, more than 20 percent of people 85 years and older die “dead broke.”

In “A look at the End-of-Life Financial Situation in America,” EBRI researcher Dr. Supidto Banerjee examined the end-of-life assets for households with a member who died between 2011 and 2012. For those who died at age 85 or older, slightly over one in five, or 20.6 percent, died with no non-housing assets and 12.2 percent had no assets at all.

A new savings mechanism, the Qualified Longevity Annuity Contract has been approved by the federal Internal Revenue Service. Still in its first year and relatively unknown, QLACs can be used to stretch retirement funds that have been set aside in tax-deferred savings accounts, such as 401(k) plans and IRAs.

The nation’s tax policies and retirement priorities conflict when savers hit the age of 70½ and are required to take “mandatory distributions” from their tax deferred savings accounts.

Workers save for retirement by placing money in tax-deferred plans that allow them to delay paying taxes on their contributions and investment earnings. But at age 70½, savers must begin making annual withdrawals and pay taxes on the money.

Many retirees would prefer to leave the money growing in their accounts to provide a financial cushion for future years when health and living expenses increase. They fear withdrawing their money early will leave them “dead broke” if they live to be 80, 90 or 100.

The IRS has approved the use of QLACs, which are limited annuities, to reduce the taxes levied on mandatory distributions and set aside money for use in later years. Retirees are allowed to put 25 percent of their retirement savings, or up to $125,000, into a deferred annuity which can provide guaranteed income that is delayed to age 85. The retirement assets used to buy the QLAC are excluded from the mandatory distribution calculation.

This annuity is not an investment; rather, it is somewhat of a “security blanket.” Consult with an accountant and financial adviser to determine if a QLAC should be included in your retirement plan.