Issue link: https://resources.envestnet.com/i/1527488
Annuities as an Asset Class for Fee-Based Advisors l 11 © Envestnet 2022 "Self-annuitizing" requires lower spending, and stocks could support higher spending with upside growth, but that adds risk as well. As for bonds, ultimately, the question is this: why hold any bonds in the part of the retirement portfolio designed to meet spending obligations? The income annuity invests in bonds and provides payments precisely matched to the length of retirement, while stocks provide opportunities for greater investment growth above bonds. Bonds alone hold no advantage. The income annuity provides a license to spend more from the start of retirement due to the insurance company's ability to pool risk. Supported spending from an income annuity is higher because it is based on reaching life expectancy, and should the retiree live beyond life expectancy, the higher income continues to be sustained because of the subsidies arriving from those who died early. The expectation that subsidies will arrive as needed allows spending to increase for everyone from the very start of retirement. [The chart below] highlights how mortality credits represent a third source of spending with an income annuity beyond the spenddown of principal and the interest generated by that principal. Regarding sequence risk, for those who "self-annuitize," there are two options for deciding how to spend from investments. One is to spend at the same rate as the annuity with the hope of either dying before running out of money, or the hope that the investments earn strong enough returns to sustain the higher spending rate indefinitely. This approach requires acceptance of the possibility that the standard of living may need to be cut later in retirement should the hopes for sustained investment growth not pan out. The alternative is to spend less early on and, should good market returns materialize, increase spending later or leave a bigger legacy. The problem with intending to increase spending over time is that it is the reverse of what most people generally wish to do, which is to spend more early in retirement and cut back as life slows down at more advanced ages. Sources of Income Annuity Payouts Principal Interest Mortality Credits (Risk Pooling)