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The Retirement Spending Account: Annuity Alternative

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A new product has emerged in the marketplace for clients looking for alternative solutions to the retirement income puzzle—a retirement spending account. The product combines aspects of both a traditional retirement savings vehicle and an annuity, seeking to solve the ever-present problem of how to ensure that a client will not outlive his or her retirement savings.

At the same time, the retirement spending account can provide a degree of control that is often lacking in an annuity product, making the option attractive to a potentially wider range of clients. However, there are potential pitfalls that clients need to be made aware of—and as this could be the next big retirement income planning trend, it’s essential that advisors stay ahead of the curve.

The Concept

A retirement spending account is essentially a fund that is managed by an asset management firm. The client invests his or her retirement nest egg (or a portion of that nest egg) with the firm, which manages the investment mix and provides the client with a monthly payout. The client can choose to withdraw a set percentage annually—usually around 4% or 5% of the total account value.

Importantly, the asset management firm adjusts the mix of investments as the client ages through retirement in order to decrease the risk that the client will outlive his or her savings. Generally, the fund will be invested conservatively during the early years of retirement in order to protect against sequence of return risk (the risk that the client’s investments will perform poorly early in retirement, lowering his or her overall returns). The account’s investment mix is gradually moved toward riskier investments during the (projected) middle years of a client’s retirement. By the time the client ages past 80, his or her investments again move toward more conservative options.

The retirement spending account offers more flexibility than a typical annuity product, because it can be sold more easily if the client needs access to the funds. If the client dies before he or she exhausts the account funds, the client’s beneficiaries will simply inherit the account. 

Some investment funds are also experimenting with a product mix that would provide for a guaranteed monthly check based upon the retirement spending account value, but would also include a small fund that could be accessed at any time for emergencies, or to provide an inheritance (essentially combining an annuity with a traditional retirement savings fund).

Potential Pitfalls

As with any type of investment product, the retirement spending account has its potential pitfalls. If the client opts to withdraw a larger portion of the account value each year (even just 5%), the investment mix will be more strongly geared toward riskier investments at any given point in the retirement life cycle—thereby increasing the risk that the client could potentially outlive his or her savings.

Further, the asset management firm will typically charge an annual fee based on the retirement spending account value, which can equal up to about 1% of account value. This fee is charged in addition to fees that the client’s own investment advisor, who sells the product, traditionally charges for his or her financial advisory services.


For most clients, determining the appropriate level of withdrawals from his or her retirement savings account can be a guessing game. The new retirement spending account product aims to eliminate some of this guesswork by managing the client’s investment mix over the course of his or her expected retirement life cycle.

Originally published on Tax Facts Onlinethe premier resource providing practical, actionable and affordable coverage of the taxation of insurance, employee benefits, small business and individuals.    

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