A financial plan is a system that allows all the parts to contribute to the success or failure of the whole plan. Planning is the act of projecting forward to what we want to build financially. There are eight components for constructing a financial plan, but I want to address the two that most often get overlooked. The first is becoming a financial consumer, and the second, is defining the purpose of each goal. In the purchasing process, as a financial consumer emotions and logic play a major role. These can be boiled down to fear and greed. These create internal conflict during the purchasing process. Advertisers focus more on the sizzle than the steak to get you to buy. They want to stir your emotions and mitigate your logic. This explains why the most common phrases used to sell products are financial loss and performance. Knowing what you want makes it easier to filter through the sizzle and find the steak. Only then will the planning process take on clarity instead of emotions.
In order to achieve your financial plan you have to purchase products that meet the purpose defined. One purpose in a financial plan is tax planning to eliminate or defer taxes when possible. A Qualified Longevity Annuity Contract (QLAC) offers owners of qualified plans (IRAs, 401ks, TSAs, etc.) to defer a portion of their required minimum distribution (RMD) to a maximum age of 85. In addition, it offers a method of income insurance during your later years by guaranteeing you will not outlive your money.
By definition, you can now determine if a QLAC fits in your financial plan. If your purpose is to defer some, not all of the RMD, for as long as possible, and insure income you cannot outlive, a QLAC may be right for you. The ability to defer your mandatory distributions will reduce your taxes currently, and provide guaranteed income later in life. Based on these assumptions it would be worth your time to further investigate how a QLAC works.
Digging into the details of the product are where your emotions may take over. But thankfully, a QLAC has limited options contractually. Asking yourself the following questions will allow you to determine if a QLAC fits in your plan.
Do you want to defer the mandatory distributions from your qualified plan beyond age 71? Do you want to insure you will have income later in life? Do you want the income for both yourself and your spouse? Do you want the income to last for your joint lives? Do you want to defer the income from both spouses’ qualified plans? Do you want to account for inflation? Do you want money to go to a named beneficiary if you die prematurely? How much money would you like to defer for this purpose?
It is important to define the advantages of a Qualified Longevity Annuity Contract (QLAC): guaranteed lifetime income deferred past age 71, options on how the income is structured (single or joint), RMD deferral to save on taxes up to a maximum age of 85, and transfer of risk with the contractual guarantees. You transfer the risk of managing your money to the insurance company in exchange for the deferral of guaranteed monthly income. If a QLAC satisfies both your logical and emotional thought process it may be a perfect fit.
It is equally important to define the disadvantages of a QLAC: the biggest drawback is the lack of liquidity. You transfer a lump sum of money to the insurance company for the deferred guaranteed income payments. This brings up the issue of fear and greed. Can you emotionally make that decision? And, can you logically and financially make that decision? If the answer is “no”, and you are willing to take on the risk of managing your own money, a QLAC will not meet your logical and emotional needs. It is best to pursue other avenues.
Weighing out the advantages and disadvantages is part of the process of being a financial consumer. Knowing your purpose makes the process of achieving your financial plan doable. If you fail to pacify both sides of your brain the final decision will be impossible and result in poor decisions. Know what you want, define your purpose, learn the details, and then make the decision. Most importantly, don’t allow fear or greed to be the determining factor. Buy the steak because it fits your needs and plans… not the sizzle.