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Annuities as an Asset Class for Fee-Based Advisors l 15 © Envestnet 2022 Income Annuities – SPIAs and DIAs We now shift to longer discussions for the key types of annuities used for retirement income planning. For those seeking to spend more in retirement than the bond yield curve can support, the alternative to seeking risk premium through an aggressive asset allocation is to use risk pooling. Income annuities are the simplest type of insurance products which trade a lump-sum payment for protected lifetime income. The ability to convert a portion of assets (as it is not an all-or-nothing decision) into a guaranteed income stream is a fundamental retirement income tool which contrasts with an investment portfolio in terms of the advantages and disadvantages for managing retirement risks. Income annuities are fixed annuities, and they are annuitized at the time of contract issuance and premium payment. This means they are immediate annuities, even if the start date for payments is deferred. We start our discussion of annuities with the income annuity because it is the most straightforward and easy-to-understand way to convert a pot of money into a guaranteed stream of spending for life. Income annuities are also known as immediate annuities, single-premium immediate annuities (SPIAs), deferred income annuities (DIAs), qualified longevity annuity contracts (QLACs), or longevity insurance. Risk pooling and mortality credits are the drivers of value from an income annuity. The annuitant accepts the risk of dying early and receiving fewer payments from the annuity in exchange for the ability to continue receiving payments no matter how long one ends up living. By pooling longevity risk with a collection of individuals, an income annuity allows its owners to earmark assets by only needing to fund retirement as though they will earn fixed income returns and live to their life expectancy. Those who end up living beyond their life expectancy will have their continuing benefits subsidized by those who die before life expectancy. While this clearly benefits the long-lived, we can also conclude that it benefits the short- lived as well by allowing them to enjoy a higher standard of living than they might have otherwise been comfortable supporting from an unguaranteed investment portfolio. This can allow for more spending and a more satisfying retirement experience, and more peace of mind compared to those self-managing longevity risk by spending less and then leaving too much behind at death. For those seeking to spend more in retirement, risk pooling (bold risk pooling) is an alternative to seeking risk premium through an aggressive asset allocation. © Envestnet 2022