Issue link: https://resources.envestnet.com/i/1527488
Annuities as an Asset Class for Fee-Based Advisors l 23 © Envestnet 2022 Generally, the most efficient means for balancing protected income and investment upside is to use annuities as a replacement for bonds and combine life-only income annuities with aggressive stock portfolios. However, this requires a degree of investor self-control and long-term focus that may be difficult to achieve in practice. It requires accepting both the loss of liquidity as annuity assets disappear from the portfolio balance, as well as accepting a more aggressive asset allocation for what remains in the portfolio. Many retirees are nervous about these trade-offs. As a means for accommodating the concerns of real-world retirees, deferred variable annuities (VAs) and fixed index annuities (FIAs) with lifetime spending protections have developed as a more palatable compromise. In practice, sales of deferred annuities dwarf sales of immediate annuities. With deferred annuities, owners continue to see the annuity assets on their financial statements as part of the overall portfolio balance. As well, those assets maintain exposure to market upside that is not provided within an income annuity. The appeal to retirees is based on the combination of downside protection with a protected income stream, upside growth potential through their underlying investments (or links to investment indices in the case of fixed index annuities), and liquidity for the underlying assets, while also offering the potential for tax-deferral. Retirees can see their account values, they can continue to make choices about how their funds are invested, they can access their funds, and any funds remaining at death are generally available to beneficiaries as a death benefit, all while ensuring protected income through the inclusion of an optional guaranteed living withdrawal benefit (GLWB) rider on the contract. Nevertheless, the features and workings of deferred annuities with lifetime income benefit riders can be rather complex. For those just starting to investigate deferred variable or index annuities, complexities relate to understanding how returns are calculated for the contract value, how the income guarantees work, and how fees are structured. Deferred Annuities with Lifetime Income Benefits For those just starting to investigate deferred variable or index annuities, complexities relate to understanding how returns are calculated for the contract value, how the income guarantees work, and how fees are structured.