Living Long and Getting Paid
Dear Mr. Berko: Could you please explain a qualified longevity annuity contract to me? A 65-year-old friend may invest $90,000 in a QLAC with MetLife. He says that when he’s 85, it would pay him $45,000 a year, even if he lived to be 110. That comes to a 50 percent return and sounds pretty good to me. What do you think of this annuity? Both my parents died in their 90s. I’m a widower, 64, healthy as can be and concerned about outliving my assets. I am considering taking $100,000 from my $650,000 individual retirement account, which constitutes all the assets I have — not including my house, which is paid off and worth $300,000. If I used $100,000, how much money could I get from a qualified longevity annuity contract? I understand that the government considers MetLife to be in financial trouble. — DL, Akron, Ohio
DL: The government is nuts. In 2014, six years after the 2008 mortgage meltdown, the idiots at the Financial Stability Oversight Council declared MetLife (MET-$44) too big to fail. So they shone the same criminal light on MET as they did on Bank of America, Citigroup, JPMorgan Chase, Goldman Sachs et al. Fortunately, federal judge Rosemary Collyer agreed that the FSOC was nuts; she sided with MET, preventing an expensive and painful overhaul of MET’s balance sheet. MET’s in fine shape, but because of numerous annuity selling infractions, I wouldn’t trust MET with your annuity business.
For many folks, a qualified longevity annuity contract is the best way to guarantee they’ll never run out of money, even if they live to be older than Methuselah. Believe it or not, there’s no need to be suspicious or concerned. Compared with other annuities — many of which have terrible reputations and are disgustingly complex, with huge sales costs and exorbitant annual fees — QLACs stand apart like a swan among geese. They’re easy to understand, and there are no annual fees. QLACs are not linked to the performance of the stock market, and your payment is fixed and guaranteed. There can also be significant tax advantages.
Assume you’re 65. Here’s how it buries. First, select a large insurance company. Chose one that has a very high A.M. Best rating, a long record of attractive dividends and a professional sales force. The money can come from your taxable account, a maturing certificate of deposit or a retirement account, such as an IRA or a 401(k). You get nothing back until you reach your 85th birthday, when the insurer begins paying you a fixed monthly income. Say you invest $100,000 in a QLAC at age 65. Twenty years from now, you can expect to receive $50,000 a year or a monthly check for $4,166.66 forever or until you pass away, whichever comes first. By comparison, if you wanted to create the same $50,000 payout with AAA corporate bonds, you would need to invest about $350,000, assuming a 4 percent interest rate.
And you can take the money from your IRA without meeting the required minimum distribution from the portion of your account that’s devoted to the QLAC. When you’re 85, the monthly payments from the insurer are deemed to fulfill the required minimum distribution for the amount invested in the QLAC.
There are some caveats, according to Northwestern Mutual: 1) If you pass before 85, the insurance company keeps every penny you invested. 2) You are limited in the amount of retirement money you can use to purchase a QLAC. The maximum is 25 percent of the value of your retirement accounts or $125,000, whichever is less. 3) Those with the good fortune to be on the distaff side have to invest about 23 percent more because ladies have longer life spans than gentlemen.
There are various riders, such as cost-of-living adjustments and return of premium, that you can purchase for your QLAC. The riders are not cheap, and their costs vary by insurer. You might also consider a reverse-annuity mortgage (the income is tax-free) to increase your lifetime income with zero risk to your homeownership.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at email@example.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
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