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Annuities as an Asset Class for Fee-Based Advisors l 42 © Envestnet 2022 Moshe Milevsky and Vladyslav Kyrychenko have provided research based on over one-million variable annuity policy holders showing that those with optional income guarantees were willing to have about a 5 percent to 30 percent higher stock allocation than those without guarantees on their variable annuities. For instance, someone willing to hold 30 percent stocks without a guarantee may increase their stock allocation to between 35 percent and 60 percent with an income guarantee in place. This demonstrates an understanding and willingness in practice to view stocks held inside the variable annuity as being less "risky" to spending goals. Having the income guarantee supported with actuarial bonds increases the risk capacity of retirees, as their retirement standard of living is less vulnerable to a market downturn. This can provide the capacity to use a higher stock allocation when a guarantee is in place, both inside and outside of a variable annuity. This works inside the variable annuity because the income guarantee protects income on the downside while still offering upside potential. Outside the variable annuity, the income guarantee reduces the harm created if portfolio assets deplete, providing increased risk capacity. There are situations when variable and index annuities might help to achieve more efficient outcomes in retirement in terms of the combination of spending and legacy over retirement portfolios without a variable or index annuity component. These relate to asset allocation and whether it may change when an income guarantee is in place. Income guarantees provide greater relative benefit to retirees who are either willing to invest more aggressively because of the guarantee, or who would otherwise be uncomfortable using stocks in retirement. Those who accept the notion that the income guarantee increases risk capacity and are willing to use a more aggressive asset allocation than otherwise both inside and outside of the annuity, could find that the additional exposure to the stock market equity premium more than offsets the annuity fees when markets perform well in retirement. The guarantee is also valuable if it otherwise stops retirees from panicking and selling stocks after a market drop. And when markets perform poorly, by paying an insurance premium for the income protection, one should anticipate depleting the underlying asset base sooner than with a lower-cost, investments-only strategy. But because the annuity still includes a lifetime guarantee, retirement spending will be supported after assets deplete. Annuities as an Asset Class for Fee-Based Advisors l 42 © Envestnet 2022

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