A. QLAC, or qualified longevity annuity contract, is a government approved annuity product designed to solve the problem of running out of money while you are still living.
It's different from the traditional annuity – with traditional annuities, you have to start making annual withdrawals at age 70 and half; with QLAC, you can defer withdrawals until age 85, so your money can continue growing on a tax-deferred basis for another 15 years.
Some problems with QLAC and potential solutions:
1. Interest rate on QLAC tend to be low when compared with a well-diversified portfolio.
However, that's the price you pay for stability, because even a well-diversified portfolio could suffer a big loss in some dramatic market situations.
2. Fees tend to be higher on these products.
However, if your goal is to solve longevity problem (money is still available while you live a very long time), fees matter little because your annuity payments not tied to the actual investment growth (which hurt by the higher fees).
3. Tax rates could be higher as the gains will be taxed at income tax rate, rather than capital gain tax rate, level.
However, if your income is not very high during your older years, this should not be a problem.
4. Lack of liquidity with the annuity products.
While some annuity products allow you for some partial withdrawals without penalty, this could be a serious issue for most annuity investors, and is the reason why you shouldn’t put all your money into an annuity contract.