The Financial Value of a QLAC
Oct 4, 2022
Blueprint Income Team
A QLAC is not only financially valuable, but it offers something traditional investments cannot: peace of mind. We’ve laid out how to determine your financial return from a QLAC.
- Comparing the financial value of a QLAC to that of traditional investments is like comparing apples to oranges.
- The longer you live, the higher the internal rate of return (IRR) of your longevity annuity.
The QLAC is like a pension you can buy for yourself from an insurance company using your pre-tax retirement savings, generating a guaranteed income that lasts as long as you do. Because of its special designation, income from QLACs can start later than 70 ½, reducing the RMDs and associated taxes. It’s a great way to diversify your portfolio, and make sure that all, or most, of your basic retirement expenses will be covered for as long as you live.
If you’re wondering about the financial value of a QLAC, you’re definitely not alone! Everyone wants to know about the internal rate of return (IRR) or return on investment (ROI) in order to compare the returns to their market investments.
However, a QLAC is an insurance product rather than a market investment, and therefore its value is measured differently. To calculate an IRR or ROI, we need to know the upfront investment and all future income amounts and dates. But a QLAC is a longevity insurance product which will provide you with income for as long as you’re alive, i.e. end date to be determined!
Instead, we can calculate a range of IRRs based on your potential lifespan. The longer you live, the higher the IRR of your QLAC. While you should think about the numerical return while making the decision to purchase a QLAC, the the risk reduction against increasing longevity and peace of mind it provides for your retirement are critical considerations.
65-year-old David bought a $125,000 QLAC with income starting at age 85. The policy could wind up generating a 4.4% return if he lives until 90, which increases to 6.6% at age 95 and 7.5% at age 100.
QLAC rates based on a $125,000 New York Life life-only policy for a male aged-65 with income starting at age 85. Rates as of 10/4/2017.
Remember, a QLAC is insurance. Its purpose is to protect your longevity via guaranteed lifetime income!
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Blueprint Income Team
We are a team of finance, insurance, and actuarial professionals working to make it easier for everyone to achieve a steady and comfortable retirement. We write about annuities (the good and the bad) and provide strategies to help Americans prepare for retirement.