I’m going to buy a single-life, life-only Qualified Longevity Annuity Contract (QLAC) from Fidelity. I am trying to solve a few problems… my IRA is large, and despite my best efforts to use it early, I may be choking on money at RMD time, because I’ll likely be a single-filer (my wife has serious health issues), which could boost me into bad Medicare Part B IRMAA surcharge brackets (think hundreds of $$$ more per month), and higher income tax brackets.
The quote is for a single-life, life-only QLAC for a 62 yo male with MassMutual.
If I spend $200,000 out of my IRA now at age 62, with no current year tax impact, then from age 85 until death I get $132,796 per year. Now… $132,796 in 23 years might only be worth $67,000 in 2023 Dollar terms, but still… it would pay itself back, adjusted for inflation, in 3 years. So if I live past my 87th birthday, I gamed the insurance company. My Dad lived to 89, and his health at 62 was way worse than mine is now.
The QLAC raises my retirement score on Fidelity’s retirement tool and Flexible Retirement Planner (by Random Walk Ventures LLC), and counterintuitively raises the ending account value for my heirs.
It solves the RMD problem partially, plugs the inflation gap in my Long Term Care plan, and improves the retirement plan overall by reducing portfolio variance (fewer Monte Carlo simulations fail). I also cannot outlive the annuity.
Finance geek notes:
The nominal internal rate of return (IRR) is 7%, assuming I live to 95, which is the end of my plan. So, where can you get something almost as risk-free as a US Treasury Bond which matures in 23 years yielding 7%… which is tax-deferred? You can’t. 20 year USTs pay 4.1%.
Pre-emptive push-back on the doubters… “BUT WITH VTI or VOO you can expect 10% long term!” No, you cannot compare an almost risk-free claim on future cash flows against a sordidly volatile investment like a 100% equity fund. The risk-free rate is the y-axis intercept of the Efficient Frontier horizon line in Modern Portfolio Theory (MPT). If you find me a stock portfolio that lies along that upwardly-sloping-to-the-right line with zero risk pegged at 7%, yes, I will buy that one from you. But they don’t exist. Bernie Madoff offered such an investment in the past, I believe. Enron, too.
TL;dr a QLAC adds a stream of cash flows which is not correlated with other components of my portfolio; the stocks, the bonds, the real assets. That non-correlation makes the whole portfolio work better. And it does so when there is a risk of running the other assets down, or towards end-of-life when long-term care needs can cause an explosive need for cash.