The longevity annuity has become increasingly popular in recent years as a potential new vehicle for retirement income, as its ability to delay payments to an advanced age like 85 allows for a significant accumulation of mortality credits. And since the introduction of last year’s Treasury Regulations, a so-called “Qualified Longevity Annuity Contract” (QLAC) can even be purchased inside of an IRA or other retirement account, allowing a portion of a retiree’s RMDs to be deferred from 70 ½ to as late as age 85!
However, as it turns out the unique nature of a longevity annuity’s payment structure is not very hospitable as an RMD deferral strategy. The fact that it can take until a retiree’s late 80s just to break even and recover principal means the retiree risks significant foregone growth by trying to merely defer RMDs through the use of a QLAC. And of course, the RMDs will still eventually happen anyway, as the QLAC merely defers when payments begin. In fact, ironically, if the retiree does live, the accelerated payments of a QLAC in the later years can actually deplete an IRA even faster than normal IRA RMDs would have anyway!
Ultimately, this doesn’t mean that the longevity annuity (or a QLAC inside an IRA) is a bad deal. The ability to accumulate mortality credits still means it can be very effective as a fixed income alternative for those who fear they may not have enough money to fund a retirement well beyond their life expectancy. And if retiree intends to spend all of his/her assets anyway, and the only available dollars for retirement are held in an IRA or other retirement account, the QLAC is an effective means to engage in such a strategy. Nonetheless, the bottom line is that while a QLAC may be a valid way to use a retirement account to hedge against longevity – and defer RMDs along the way – it’s still not very effective as an RMD avoidance or deferral strategy! Just because you can buy a longevity annuity inside a retirement account as a QLAC doesn’t mean you should!