On July 2, the IRS published final regulations on Qualified Longevity Annuity Contracts (QLACs). As discussed in the post of February 11, 2012 that we published shortly after the proposed IRS regulations were released, retirees may find purchase of a QLAC or several QLACs to be an effective way of managing their longevity risk.
I found the following summary of the final QLAC regulations and how they changed from the proposed regulations prepared by Davis & Harman LLP, outside legal counsel for the Spark Institute, to be thorough and relatively easy to read.
What should a retiree interested in purchasing a QLAC do now? Unfortunately, until a more robust market for these products emerges, it is probably a good idea to wait. However, I am not a financial planner or an investment professional. Also, I am no expert on annuity products. Therefore, you should not rely on my advice. As a retired actuary I can tell you that by waiting to purchase a deferred annuity, it is possible that interest rates will increase and/or the market will become more competitive and premiums for a given level of retirement income and number of years of deferral could become less expensive. However, absent such changes, the longer you wait to purchase the annuity, the lower your retirement income will be at a given benefit commencement age for a given premium (since the period of deferral will be less). Before you commit to buying a QLAC with your qualified plan money, 403(b) account, IRA or 457(b) account, you will probably want to discuss the issue with your financial planner, solicit several quotes from reputable insurance companies and make sure that whatever you buy meets the QLAC rules and will not be considered a taxable distribution at the time of purchase.
As we said in our post of October 2, 2013, you can use our Excluding Social Security V2.0 Spreadsheet to estimate how much deferred retirement income you may want to purchase or to simply coordinate your spending strategy with the QLAC or QLACs you purchase (assuming they all commence at the same age).
