Not Outliving Your Retirement Savings

by | Aug 3, 2023 | Videos

In this week’s video, Casey discusses the concern of outliving your retirement savings. This is the BIGGEST worry many retirees have and for good reason. With rising costs and the uncertainty of the market, folks may want to lock in a source of income in the future.

But, as Casey will cover, that source of future income requires many sacrifices and may not be worth it after all.

If you are worried about outliving your retirement savings be sure to check out this week’s video!

Show Notes

A Retirement Tax Break That Ends the Fear of Outliving Your 401(k) – The Wall Street Journal 

Don’t Use a QLAC to Avoid RMDs – Michael Kitces

Should We Fear Volatility – Mullooly Asset Podcast

Not Outliving Your Retirement Savings

There’s a way to guarantee you won’t outlive your retirement savings. There’s gotta be a catch, right? Keep watching to find out what it’s

Welcome back to the Mullooly Asset Show. I’m your host, Casey Mullooly. Happy to be back. It’s been a while and we’ve got a good one here. Today we’re gonna talk about outliving your savings in retirement. That’s probably the biggest risk. The biggest concern that we here when we meet with folks is that they wanna make sure that they don’t run outta money in retirement.

So the Wall Street Journal wrote about a new-ish annuity product that’s been around for about 10 years now. It’s called a qualified Longevity Annuity contract, or a QAC for short. And the way it works is you take a lump sum of money from one of your tax deferred accounts, let’s say 4 0 1 k or an i r a. You use that lump sum to purchase the annuity, and the annuity is still deferred. It’s not an immediate annuity. So you don’t get any money for it.

It usually starts, the qac usually starts around age 85. Um, so you purchase the annuity, the payments start at 85, and then they are guaranteed to continue for the rest of your life.

So if you purchase a qac, you’re guaranteed to at least have some sort of income stream for as long as you live. And that provides a lot of folks with, with peace of mind. The other benefit of the QAC is that since you’re taking the money from a tax deferred account and putting it into another deferred product, the deferred annuity, you don’t have to pay RMDs on that lump sum.

So RMDs are required minimum distributions. For those that don’t know, they kick in at age 73. For those tax deferred accounts, you have to take, uh, a portion of the account out each year and pay tax on it. So you, with the qac, you avoid paying that tax at least for a little while.

We’ll get to that later on. The pros are guaranteed income for as long as you live and avoid paying some tax. Let’s get to the cons though, ’cause I think they might outweigh the pros. The first con is you’re using a lump sum of money to lock in an income stream.

Let’s say 15, 20 years from now, you’re gonna lose some purchasing power because the QAC isn’t tied to the market at at all. It doesn’t grow, uh, it’s a fixed amount of payment. So you’re not gonna be keeping up with inflation, you’re gonna be losing some purchasing power. Number two is, if you left that money invested in the tax referred account, yes you would have to pay some on it, but it would be invested in some capacity. So you’re missing out on that potential growth, let’s say five, six, 7% on average per year.

Uh, that could add up over, you know, 15 or 20 years. So second con, you’re missing out on, uh, potential growth. The third con, and this is a major problem, is that you have to live several years beyond when the payments start for the qac for you to even get your principle back. So you have to take that into consideration. The fourth problem with the QAC is that your money is tied up in it.

You can’t access it, you can’t borrow against it. There’s no flexibility. There’s no liquidity there. Um, so that is, you definitely have to take that under consideration as well.

And the fifth major problem, not a problem, but the fifth thing to think about is that you have to pay ordinary income tax on the QAC payments anyway. So yes, you’re avoiding RMDs today, but you’re gonna have to pay income tax on it down the road. So you’re basically, you’re kicking the can.

So you gotta, you gotta think about all those things, um, when you are deciding to purchase a qac. With all that being said, retirement income planning is all about marrying what people are comfortable with, comfortable with, with what they need to, uh, accomplish their goals and, and not outlive those, uh, not outlive the retirement savings. So that is the message for this week’s episode of the Mullooly Asset Show. It’s good to be back. Thanks for watching. We’ll be back with you next week.

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