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Annuities as an Asset Class for Fee-Based Advisors l 40 © Envestnet 2022 Meanwhile, someone who has less fear about outliving his or her portfolio, has additional income sources from outside the portfolio, has the flexibility to cut portfolio spending without adversely impacting the living standard, and has sufficient additional reserves, a higher spending rate and more aggressive asset allocation could be quite satisfactory and optimal. Repositioning a portion of assets into an annuity offering lifetime income protections will contribute to better achieving these characteristics. First, reliable income is increased through the annuity. More of the spending goal is now covered by reliable income assets that are not exposed to downside market risk. I use the term GRIP, or Guaranteed Retirement Income Percentage, to describe this concept. When the GRIP increases, more of the total spending budget is covered by resources with lifetime protections. This reduces the harm of investment portfolio depletion because more retirement spending is available outside the portfolio. With less exposure to downside market risk, the retiree has greater risk capacity and can rest more easily with a higher stock allocation for what remains. Adding protected lifetime income provides a stronger GRIP on retirement. Second, for those with longevity risk aversion who are planning for a retirement lasting beyond life expectancy, using annuities with lifetime income benefits can mean that the present value of annuity benefits in the financial plan is greater than the annuity cost. With this subjective view toward longevity, the annuity asset is worth more than the premium, and this increases the funded ratio for the plan. Though the annuity does not increase plan assets in the objective sense, it does increase assets in the subjective sense that the plan is aiming to work to an advanced age, and people who live longer will receive more from the annuity. The remaining portfolio is available for more discretionary uses since the mortality credits of the annuity are covering more of the spending goal in the long run. The retirement is more secure, justifying a higher stock allocation for the portfolio piece of the asset base. The third factor is the availability of reserves. What other resources are available that have not been earmarked to manage spending and can be used to cover contingencies? Having more reserves available means less reliance on the assets covering other goals to outperform and to create reserves through market gains. By helping to meet spending goals with less assets, the annuity creates additional reserves that provide true liquidity. With this added flexibility, the retiree can feel more comfortable with the aggressive asset allocation because there is less exposure to the possibility of having to sell assets at a loss to cover contingencies, and then not having enough left to cover other subsequent spending needs. Repositioning a portion of assets into an annuity offering lifetime income protections will contribute to better achieving these characteristics. Annuities as an Asset Class for Fee-Based A © Envestnet 2022

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