It is admittedly no simple task to plan one’s retirement with confidence. Even the federal government isn’t entirely clear on its recommendations to individuals who are working to prepare for a financially secure future.
On one hand, the Internal Revenue Service last year created rules that allow us to invest part of an IRA or 401(k) in a Qualifying Longevity Annuity Contract, or QLAC. This financial product can guarantee a substantial lifetime income late in retirement in return for a lump-sum investment before or early in retirement. It is a special form of a deferred income annuity.
Lifetime income options like annuities provide a regular stream of income regardless of lifespan. Yet fewer than one in five defined contribution plans offer annuities, with the share falling sharply over time.
But it was unclear whether the conference was referring to QLACs or immediate annuities, which provide guaranteed lifetime income now to cover current expenses but at a lower payout because it starts immediately.
Working out the differences
Such disconnect among government agencies might not be unusual, and perhaps in this case it reflects simply a timing issue because of the relative newness of the QLAC rules. That might be expected, since journalists, blogging financial advisors and others often offer misinformation about the different forms of annuities, even mixing up accumulation annuities with payout annuities.
I am confident that eventually the debate will reveal the genuine value of income annuities to everyone – and it will then be easier to decide how and when to integrate them into individual retirement plans.
Both immediate and deferred income annuities provide predictability and stability in income. The key to getting the most benefit out of either is understanding your own needs:
- today for current cash flow or
- later in retirement when medical expenses and health concerns are likely to be a bigger financial burden.
How the government could guide retirement advice
The federal government might one day offer more guidance to help investors, perhaps designating an income annuity or income annuity–based portfolio as a default option for people who invest in 401(k) plans. That would encourage investors at least to consider the benefits of an income annuity while also allowing them to choose entirely different approaches.
Income annuities – whether immediate or deferred, like a QLAC – offer alternatives. When you decide which attributes you want from your portfolio, you can start making decisions for your own future, whether or not the government offers advice.
Next week: How to stop worrying about whether the market will affect your retirement.