Envestnet Whitepapers

Annuities as an Asset Class for Fee-Based Advisors l 39 © Envestnet 2022 Annuities, Asset Allocation, Legacy, and True Liquidity The next important detail is deciding which investment assets should be sold to fund the annuity purchase. The potential benefit from annuities depends in part on how they are treated as part of asset allocation. Annuities have a better chance to work when they are treated as a bond and funded through the sale of bonds. Annuities become a bond replacement. That is the idea of the efficient frontier for retirement income mentioned in the previous section: stocks and annuities, instead of stocks and bonds. Over the long term, this can lay the foundation for greater legacy and liquidity for the retirement plan after also providing a stronger foundation to meet spending goals. Annuities are not the intended source for legacy or liquidity. Income annuities do not provide liquidity or legacy without adding provisions which reduce the value of their mortality credits. As well, for deferred annuities with income benefits, the point is to use these assets to support spending and the liquidity and legacy potential of the assets is of less importance even though it may be a behavioral selling point for the annuity. These assets can be spent down because they continue to provide income even after they are depleted, and this can provide relief for other non-annuity assets to have less commitment to funding spending and more opportunity to grow. There is more to the story about liquidity and legacy as relates to how an annuity fits into an overall plan. Often the discussion around annuities frames the matter incorrectly, as if it is an all-or-nothing decision. Partial annuity allocations let us think about how we allocate assets toward meeting different goals. Annuities will work best when their owners view them as part of the "bond" allocation for retirement, so that overall stock holdings do not decrease with a partial annuity strategy. To keep the value of stock holdings the same, this does suggest that the stock allocation will be higher for the remaining portfolio assets outside the annuity. While this can cause some behavioral concerns, treating the annuity as a bond is justified. In the discussion about "optimal withdrawal rates" from the previous chapter, we noted that for someone who worries about outliving his or her portfolio, does not have much additional income from outside the portfolio, mostly faces fixed expenses without much room to make cuts and does not have much in the way of backup reserves, it may be necessary to spend and invest quite conservatively to achieve a high probability of plan success. This individual has less capacity to bear financial market risk because their lifestyle is more vulnerable to a market downturn. In an investments-only world, such individuals would look to using a lower stock allocation and a lower spending rate. There is more to the story about liquidity and legacy as relates to how an annuity fits into an overall plan. Often the discussion around annuities frames the matter incorrectly, as if it is an all-or- nothing decision. Partial annuity allocations let us think about how we allocate assets toward meeting different goals.

• Cover