Envestnet Whitepapers

Annuities as an Asset Class for Fee-Based Advisors l 8 © Envestnet 2022 Meanwhile, sequence risk relates to the amplified impacts that investment volatility has on a retirement income plan that seeks to sustain withdrawals from a volatile investment portfolio. Even though we may expect stocks to outperform bonds, this amplified investment risk also forces conservative individuals to spend less in case their early retirement years are affected by a sequence of poor investment returns. Many retirement plans are based on Monte Carlo simulations with a high probability of success, which implicitly assumes lower investment returns. An income annuity also avoids sequence risk because the underlying assets are invested by the annuity provider, mostly into individual bonds which create income that matches the company's obligations for covering its promised annuity payments. In hindsight, those who experienced either shorter retirements or who benefited from retiring at a time with strong market returns would have probably preferred if they had not purchased an income annuity. Income annuities are a form of insurance. They insure against outliving assets due to some combination of a long life and poor market returns. In the same vein, someone who purchased automobile insurance might wish they had gone without if they never had an accident. But this misses the point of insurance. We use insurance to protect against low probability but costly events. In this case, an income annuity provides insurance against outliving assets and insufficient income late in retirement. Income annuities offer an important benefit to those who do not make it long into retirement, especially for those who are particularly worried about outliving their assets. That benefit can be seen when comparing the income annuity to the alternative of basing retirement spending strictly on a systematic withdrawal strategy from an investment portfolio. To "self- annuitize," a retiree must spend more conservatively to account for the small possibility of living to age ninety-five or beyond while also being affected by a poor sequence of market returns in early retirement. The income annuity supports a higher spending rate and standard of living than this from the outset. All income annuity owners, both the short-lived and long-lived, can enjoy a higher standard of living during their life than they would have otherwise felt comfortable with by taking equivalent amounts of distributions from their investments. Upon entering retirement, a retiree has several options regarding allocations between stocks, bonds, and income annuities. Income annuities offer an important benefit to those who do not make it long into retirement, especially for those who are particularly worried about outliving their assets. © Envestnet 2022

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