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Annuities as an Asset Class for Fee-Based Advisors l 36 © Envestnet 2022 Upside Exposure, Downside Protection, and Liquidity Provisions Given a targeted amount of annuity income, the next question becomes what type of annuity to use: income annuities, variable annuities, or index annuities? Each provides a different balance among the tradeoffs between upside potential, downside protection, and liquidity provisions. As a simple starting point, income annuities, when treated as bonds, will frequently be the most efficient way to incorporate lifetime income into a plan. This was a conclusion I have reached when exploring the efficient frontier for retirement income where I look at performance of various combinations of asset classes and annuities. I found that stocks and income annuities replace stocks and bonds on the efficient frontier for retirement income planning. The efficient frontier is about the tradeoffs between risk and return and finding asset and product allocations that cannot provide greater advantage for one without creating loss for the other. For retirement, that involves the trade-off between satisfying spending goals for life and preserving financial assets for legacy and liquidity. Deferred annuities with lifetime income provisions also tend to beat bonds for retirement income because of the mortality credits they provide to help support spending in the event of a long retirement. In practice, it is uncommon to find someone who is comfortable with the combination of a life-only income annuity and very aggressive asset allocation for the remainder of the investment portfolio. The math shows this to be the most effective combination, but it is not the most palatable as retirees have concerns about both life-only annuities and high stock allocations for the rest. Deferred variable annuities and fixed index annuities play a role for those attracted to the upside and liquidity features they offer compared to income annuities. In some circumstances, they may even make it to the efficient frontier of options by providing higher protected income levels or a better overall asset allocation for retirees struggling with the concept that income annuities should replace bonds. Deferred annuities also offer greater flexibilities for the income start date and the opportunity to exchange into a different annuity or even no annuity in the future, as there is less lock-in when the contract has not been annuitized. In practice, it is uncommon to find someone who is comfortable with the combination of a life-only income annuity and very aggressive asset allocation for the remainder of the investment portfolio.

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