Use a QLAC to afford delaying Social Security

A QLAC works like a delayed annuity that you buy with money from your retirement accounts today, but it doesn't start paying you until much later—typically between ages 80 and 85.

Here's the basic setup: You can invest up to $200,000 or 25% of your qualified retirement account balances (whichever is less) into a QLAC. This money gets removed from your required minimum distribution calculations, which means you'll owe less in taxes during your early retirement years.

How Social Security Timing Affects Your Benefits

Social Security benefits increase by 8% each year you delay claiming from your full retirement age until age 70. If your full retirement age is 67, waiting until 70 means you'll get 124% of your full benefit instead of 100%. That's a permanent 24% boost for life.

For someone with a $2,000 monthly benefit at full retirement age, waiting until 70 means $2,480 per month instead. Over 20 years, that's an extra $115,200 in total benefits.

The Income Bridge Strategy

The challenge is covering your expenses from retirement until age 70 without Social Security. This is where QLACs shine. You're essentially trading some of your retirement savings today for guaranteed income starting at age 80 or 85.

Example scenario: Sarah retires at 62 with $800,000 in her 401(k). She invests $200,000 into a QLAC that will pay $2,500 monthly starting at age 85. She lives on her remaining $600,000 plus part-time work until age 70, then claims maximized Social Security benefits.

Tax Benefits During the Waiting Period

QLACs reduce your required minimum distributions, which can keep you in lower tax brackets during early retirement. If you're living on smaller amounts while delaying Social Security, this tax advantage becomes even more valuable.

You might also consider using a high-yield savings account for your short-term expenses during this bridge period, ensuring your immediate needs are covered while your QLAC grows.

Comparing QLACs to Other Bridge Options

Unlike bonds or dividend stocks, QLACs guarantee you won't outlive your money. They're insurance against living to 95 or 100. However, they're also irreversible—once you buy a QLAC, that money is locked up.

For more flexible options, you might explore investment platforms that offer lower fees for managing your bridge funds, or consider robo-advisors for automated portfolio management during your waiting period.

The key is matching your risk tolerance with your longevity concerns. QLACs work best for people who prioritize guaranteed income over leaving an inheritance.

QLAC Contribution Limits and Account Requirements

The IRS sets specific rules for how much you can put into a QLAC and which accounts qualify.

Current QLAC Investment Limits

You can invest up to $200,000 or 25% of your qualified retirement account balances, whichever is less. This limit applies across all your eligible accounts combined. So if you have $600,000 in your 401(k) and $400,000 in your IRA, you could invest up to $200,000 total (not $250,000, since the dollar limit caps it).

The 25% calculation happens when you buy the QLAC, not when payments start. This means you don't need to worry about future account balance changes affecting your QLAC.

Which Accounts Are Eligible

QLACs work with most employer-sponsored retirement plans and traditional IRAs. This includes 401(k)s, 403(b)s, 457 plans, and traditional IRAs. However, you can't use Roth IRAs for QLAC purchases since these accounts don't have required minimum distributions.

If you're planning this strategy, consider consolidating multiple small accounts to simplify your QLAC purchase and retirement planning.

How QLACs Reduce Required Minimum Distributions

Here's where QLACs get really smart for tax planning. The money you put into a QLAC doesn't count toward your RMD calculations starting at age 73.

Let's say you have $800,000 in retirement accounts at age 73. Without a QLAC, your first RMD would be about $30,000. But if you'd put $200,000 into a QLAC, your RMD calculation only uses $600,000, dropping your required withdrawal to about $22,500.

This gives you more control over your tax bracket during your early retirement years.

Timing Your QLAC Purchase

Best Times to Buy:

• Before age 73 to maximize RMD reduction benefits
• During market downturns when you're hesitant to sell investments
• When you're in a high tax bracket and want to reduce current-year RMDs

Consider Waiting If:

• You're in poor health (QLACs favor longevity)
• Interest rates are rising rapidly (QLAC payouts may improve)
• You need maximum flexibility with your retirement funds

Spousal QLAC Options

Married couples can structure QLACs to continue payments to a surviving spouse. Joint life options typically reduce the monthly payment amount but provide security for both partners.

You can also buy separate QLACs for each spouse, potentially allowing up to $400,000 in total QLAC investments if you both have sufficient retirement account balances.

For couples using this Social Security delay strategy, consider which spouse has the higher benefit and prioritize their delay to age 70, using the QLAC to bridge their income gap.

Creating Your Income Bridge Strategy

The key to successfully delaying Social Security lies in building a reliable income bridge that covers your expenses from retirement until age 70. This strategy requires careful planning and the right financial tools to make it work.

Calculating Your Income Gap

Start by figuring out exactly how much money you'll need each year between retirement and age 70. Most retirees need about 70-80% of their pre-retirement income to maintain their lifestyle.

Let's say you need $60,000 annually to cover expenses. If you retire at 62 and delay Social Security until 70, that's 8 years of income you need to replace. You're looking at roughly $480,000 total.

But here's the good news: delaying Social Security from full retirement age (67) to 70 increases your monthly benefit by 24%. If your full retirement benefit would be $2,500 monthly, waiting until 70 gets you $3,100 monthly instead.

Don't forget healthcare costs, which typically increase with age. A good rule of thumb? If you spend $60,000 annually while working, plan for $45,000-$50,000 in early retirement.

Now assess your other retirement income sources during this period. Maybe you'll work part-time, earning $15,000 annually. Perhaps you have a small pension or rental income. Some retirees use investment platforms to generate dividend income during this bridge period.

QLAC Payout Timing Options

QLACs offer several payout start dates, typically between ages 80-85. The later you start payments, the higher your monthly income will be.

Common QLAC scenarios:

• $100,000 QLAC starting at age 80: roughly $1,200-1,400 monthly
• $100,000 QLAC starting at age 85: roughly $2,000-2,400 monthly
• Return of premium options: lower payments but protects your investment

The sweet spot for most people is starting QLAC payments around age 82-83. This balances decent monthly income with reasonable longevity assumptions.

Age 80 vs. Age 85 Payouts
Starting payments at age 80 gives you more years of income but smaller monthly checks. Wait until 85, and you'll get bigger payments for fewer years. It's like choosing between a longer, thinner stream or a shorter, fatter one.

For a $100,000 QLAC, you might get $1,200 monthly starting at 80 versus $1,800 monthly starting at 85. The break-even point usually falls around age 90-92.

Return of Premium Protection
Most QLACs offer return of premium riders. This means if you die before collecting your full investment, your heirs get the difference. It's peace of mind that costs about 10-15% of your monthly payment.

Inflation Protection Considerations
Fixed QLAC payments lose buying power over time. A $1,500 monthly payment at age 80 might feel like $900 by age 95 with 3% inflation.

Some contracts offer inflation riders that increase payments by 1-3% annually. These cost significant monthly income upfront but protect your purchasing power later.

Implementation Timeline

Years 62-70: Building Your Income Bridge

The first phase requires careful cash flow management while your Social Security benefits grow by 8% annually. You'll need to cover all living expenses through a combination of retirement account withdrawals, part-time work, or other income sources.

Consider using a high-yield savings account to park funds you'll need in the next 2-3 years. For longer-term needs, you might tap into taxable investment accounts first, preserving tax-advantaged retirement funds for later.

Age 70: Maximum Social Security Kicks In

This is payday. Your Social Security benefits are now 132% of what you would've received at full retirement age. For someone with a full retirement age benefit of $2,000, that's an extra $640 monthly—or $7,680 annually—for life.

The timing here is crucial. You'll want to apply for benefits about three months before your 70th birthday to ensure payments start on time. Don't wait longer than age 70—there's no additional benefit for delaying past this point.

Ages 80-85: QLAC Safety Net Activates

Your QLAC payments begin just as healthcare costs typically increase and other retirement assets may be depleting. This creates a three-layer income foundation: Social Security, any remaining retirement savings, and guaranteed QLAC payments.

For example, a $150,000 QLAC purchased at age 65 might provide $2,500-$3,500 monthly starting at age 85, depending on the specific contract terms and payout options you selected.

Comparing QLACs to Alternative Delay Strategies

Once you've decided to delay Social Security, you'll need to choose how to bridge the income gap. QLACs aren't your only option—let's break down the alternatives.

Traditional Investment Approaches vs. QLACs

Bond ladders offer predictable income and principal preservation. You can build a ladder that matures between ages 62-70, providing steady cash flow. However, they don't protect against longevity risk like QLACs do. If you live to 95, your bond ladder won't magically create more money.

Dividend-paying stocks provide growth potential and inflation protection through rising dividends. Companies like Coca-Cola and Johnson & Johnson have increased dividends for decades. But here's the catch—dividends can be cut during recessions, and stock prices fluctuate. Your bridge strategy becomes a roller coaster ride.

Cash and Conservative Options

High-yield savings accounts and CDs offer complete liquidity and FDIC protection. Quorum's HighMarq Savings provides 4.25% APY on balances over $10,000 with full access to your funds. The downside? Inflation will slowly eat away at your purchasing power over 8+ years.

Money market accounts split the difference between savings and investment returns. They're perfect for short-term bridges but won't keep pace with rising costs long-term.

Risk vs. Reward Analysis

Here's where QLACs shine: they're the only option that guarantees you won't outlive your money. Sure, you're locking up funds until age 80-85, but you're buying insurance against living too long.

Conservative investors who lose sleep over market volatility should lean toward QLACs. Aggressive investors comfortable with risk might prefer a diversified portfolio of stocks and bonds.

Hybrid Strategies That Actually Work

Smart retirees don't pick just one approach. Consider this combination:

• 60% traditional investments for flexibility
• 40% QLAC for longevity protection
• Emergency fund in high-yield savings

This gives you growth potential, guaranteed late-life income, and liquidity for emergencies. It's like having your cake and eating it too—just with better financial planning.

Maximizing Your QLAC and Social Security Combination

Getting the most from your QLAC and Social Security strategy requires careful planning across multiple areas of your financial life.

Optimal QLAC Allocation Strategy

Most financial experts recommend allocating 10-25% of your total retirement assets to a QLAC. This gives you longevity protection without tying up too much money.

Here's how to think about it:

• Conservative approach: 10-15% of retirement assets in QLAC
• Moderate approach: 15-20% of retirement assets in QLAC
• Aggressive longevity protection: 20-25% of retirement assets in QLAC

Remember, you can't put more than $200,000 or 25% of your qualified accounts into QLACs. But you don't have to max out these limits.

Tax Planning Across Life Phases

Your QLAC and Social Security combination creates three distinct tax phases:

Phase 1 (Ages 62-70): Lower Income Years
During this period, you'll live off taxable accounts, Roth withdrawals, or part-time work. This keeps your tax bracket low.

Phase 2 (Ages 70-80): Moderate Income Years
Social Security kicks in at age 70, plus required minimum distributions from remaining retirement accounts. Your tax burden increases but stays manageable.

Phase 3 (Ages 80+): Higher Income Years
QLAC payments begin, potentially pushing you into higher tax brackets. Plan for this by managing other income sources.

Consider working with a tax professional who understands retirement planning to optimize your strategy. SuperMoney's tax services can help you compare tax preparation options.

Estate Planning Considerations

QLACs affect your estate differently than other retirement assets:

• Return of premium QLACs: Provide death benefits to heirs if you die early
• Life-only QLACs: Offer higher payments but no death benefit
• Joint life QLACs: Continue payments to your spouse

Traditional IRAs and 401(k)s pass to heirs with required distributions. QLACs might not, depending on your contract terms.

Partial Social Security Claiming Strategies

Sometimes claiming partial Social Security benefits makes sense:

Spousal Benefits Strategy
If you're married, one spouse might claim early while the other delays until age 70. This provides some income while maximizing the higher earner's benefit.

Health Considerations
If serious health issues arise, claiming Social Security early might make more sense than sticking to your original plan.

Market Volatility Protection
During severe market downturns, claiming Social Security early can reduce pressure on your investment accounts.

Monitoring and Adjusting Your Strategy

Your QLAC and Social Security strategy isn't set in stone. Review it annually:

Health Changes
New health diagnoses might change your longevity outlook. This could affect whether delaying Social Security still makes sense.

Financial Market Shifts
Major market changes might require adjusting your withdrawal strategy from other accounts.

Interest Rate Environment
Rising rates might make new QLACs more attractive. Falling rates might make your existing QLAC look better by comparison.

Legislative Changes
Congress occasionally modifies Social Security and retirement account rules. Stay informed about changes that might affect your strategy.

Working with Financial Professionals

This strategy involves complex moving parts. Consider working with:

• Fee-only financial planners who can analyze your complete situation
• Tax professionals who understand retirement account distributions
• Insurance specialists who can explain QLAC contract details

Many investment platforms now offer retirement planning tools that can help you model different scenarios.

The QLAC and delayed Social Security strategy works best for people with good health, adequate savings, and family longevity. If these don't describe your situation, consider alternative approaches to retirement income planning.

Key Takeaways for QLAC Social Security Strategy

Using a QLAC to delay Social Security can boost your lifetime income by hundreds of thousands of dollars. The math is simple: every year you wait past full retirement age until 70 adds 8% to your monthly Social Security check. That's a 32% increase for waiting four years.

Financial Impact Summary

A $200,000 QLAC investment can bridge the income gap while your Social Security benefits grow. Here's what you're looking at:

• Social Security at 67: $2,500/month = $30,000/year
• Social Security at 70: $3,100/month = $37,200/year
• Extra annual income: $7,200 for life

Over 20 years, that's $144,000 in additional Social Security payments. Your QLAC provides backup income starting around age 80-85, protecting against outliving your money.

Essential Evaluation Factors

Health and longevity matter most. If you're in poor health or have a family history of shorter lifespans, claiming Social Security early might make more sense. But if you expect to live into your 80s or 90s, the QLAC strategy pays off big.

Cash flow needs are crucial. Can you cover expenses from age 62-70 without Social Security? You'll need other income sources like savings accounts, part-time work, or withdrawals from retirement accounts.

Market timing isn't everything. QLACs protect against sequence of returns risk—the danger of poor market performance early in retirement. They guarantee income regardless of what stocks or bonds do.

Action Steps to Get Started

Step 1: Calculate your Social Security benefits at different claiming ages using the SSA website. The difference might surprise you.

Step 2: Review your retirement account balances. Remember, you can only put 25% or $200,000 (whichever is less) into a QLAC.

Step 3: Get QLAC quotes from multiple insurance companies. Rates vary significantly between providers. Compare payout amounts, start dates, and optional features like inflation protection.

Step 4: Consider working with a fee-only financial advisor who can model different scenarios. They'll help you see how QLACs fit with your other retirement assets and investment strategies.

Critical Considerations About Irreversibility

You can't change your mind. Once you buy a QLAC, that money is locked up until payments begin. Same with Social Security—once you claim, you can't go back and wait for higher benefits.

Inflation is your enemy. Most QLACs pay fixed amounts that lose purchasing power over time. A $1,000 monthly payment in 2024 might feel like $600 in today's dollars by 2044.

Your heirs might get nothing. Unlike other retirement accounts, QLACs often don't pass to beneficiaries. If you die before payments begin, your family could lose that entire $200,000 investment (unless you choose return-of-premium options that reduce monthly payments).

The QLAC Social Security delay strategy works best for healthy individuals with other retirement income sources who want to maximize lifetime benefits. It's not right for everyone, but for the right person, it can add serious money to retirement. Start by running the numbers on your specific situation—the math will tell you if this strategy makes sense.