Annuity Alternative for Estate Planning

One common estate planning tool for people entering retirement is the use of an annuity for their retirement funds; however, recently a product has emerged on the scene. A retirement spending account has now become an alternative to an annuity by controlling the amount of distributions and simultaneously providing a degree of control over the retirement funds. It is a new way for people to continue to save in retirement while also controlling the amount that they spend.

What is a Retirement Spending Account?

The purpose of a retirement spending account is to combine the benefits of both an annuity and savings account while also minimizing the disadvantages of both. It seeks to resolve the issue of not outliving your retirement savings while not constricting a person’s power over their own money like in an annuity. A retirement spending account is a fund that is managed by an asset management firm. The firm invests the retirement money, manages the account, and provides the retiree with a monthly distribution.

A retirement spending account can eliminate some of the guesswork involved in retirement spending. It also places these funds in the hands of professionals that can best manage your investment over a long period of time. It can provide some protection to retirees regarding their spending and saving for the future when there is no steady stream of income.

Benefits of Retirement Spending Accounts

There are many benefits to using a retirement spending account in an overall estate plan. Typically, a person can choose how much they wish to receive in distributions every year, and the average amount is between four and five percent of the total account value. The asset firm manages the investment so that the retiree does not outlive the money invested and adjusts the investments as necessary to fit their client’s needs.

A retirement spending account also provides more flexibility than an annuity because the funds can be easily liquidated if the need arises, such as for a medical emergency or long-term care costs. In addition, other aspects of estate planning can be incorporated like naming beneficiaries to the account if the person passes away before exhausting the account’s funds. That way, the funds pass directly to heirs instead of first passing through the probate process.

Potential Drawbacks to Retirement Spending Accounts

Similar to any other investment vehicle, there are inherent risks to a retirement spending account. While an asset firm will try to invest to avoid such pitfalls, drops in the market can affect the amount of your spending account. In addition, if a retiree opts to withdraw a larger amount every year, then they may outlive their savings. It is also important to note that the asset management firms will take a fee annually for the management of these accounts. Typically, these firms will charge up to one percent of the fund’s value for its management, but depending on the value of the account the management fee can be less.

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