Envestnet Whitepapers

Annuities as an Asset Class for Fee-Based Advisors l 28 © Envestnet 2022 Roll-up rates are often misunderstood as guaranteed returns for the annuity. These rates do not impact the contract value of assets. Their role is only to determine the hypothetical benefit base that is combined with a guaranteed withdrawal rate to determine the guaranteed lifetime income. It is the interaction of these two components that matters. At some point, the owner may stop deferring and turn on their lifetime distributions. If the retiree does not take out more than the guaranteed withdrawal amounts, guaranteed withdrawals never decrease, even if the account balance falls to zero. One exception to this is that some companies market a feature that allows for higher distributions when assets remain and lower distributions after assets deplete. The contract may be terminated at any point with the contract value of the remaining assets, net of any potential surrender charges, returned to the owner. Deferred annuities generally make a distinction between distributions that are covered by the lifetime income guarantee rider, and one- time distributions that are not covered by the guarantee. Non-lifetime distributions may be allowed before guaranteed income begins. That distinction is important, as it would generally allow rollups to continue, as rollups mostly end once guaranteed distributions begin. As well, non- lifetime distributions beyond the guaranteed level are allowed after the guaranteed distributions begin, but this will reduce subsequent guarantees. The deferral period ends once guaranteed lifetime distributions commence, beginning the distribution period. Guaranteed income will be set using an age-based guaranteed withdrawal or payout percentage rate applied to the value of the benefit base. The guaranteed withdrawal rate multiplied by the benefit base sets a guaranteed distribution amount supported for life, even if the contract value of the underlying assets is depleted. Guaranteed distributions may even increase through step-ups if new high watermarks are reached for the underlying asset base on the designated dates when this is checked. For a simple example, a company might offer the following payout rates to single individuals based on the age that lifetime withdrawals begin: 4.5 percent for ages fifty-nine to sixty-four, 5 percent for ages sixty-five to sixty-nine, 5.5 percent for ages seventy to seventy-nine, and 6.5 percent for ages eighty and over. For couples, payout rates would generally be 0.5 percent less and would be based on the age of the younger person. For couples, another possibility could be that the payout rates remain the same as for singles, but that a higher fee is charged to support the guarantee over the longer expected joint lifetime. GLWB annuity payouts generally do not make a distinction between genders, which would provide benefit to longer living women relative to men.

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