Envestnet Whitepapers

Annuities as an Asset Class for Fee-Based Advisors l 43 © Envestnet 2022 Variable and index annuities could also create better outcomes for those who would simply use a lower stock allocation no matter the chosen retirement strategy, but who are unwilling to sacrifice the liquidity foregone with an income annuity. With a low stock allocation, investment assets are more likely to deplete, as there is only so much spending that bonds can support. The annuity provides the opportunity to continue with income for life even after the contract value of assets is gone. Without exposure to the risk premium, the contract value of underlying assets is more assured to deplete in the event of a long retirement. With investments-only, asset depletion ends the ability to spend, but an income guarantee assures this continued spending ability for life. When allocating from bonds to annuities with lifetime income protections in the retirement income plan, the risk pooling from annuities can lay the foundation for more legacy (at least after life expectancy) and liquidity in the financial plan. In early retirement, legacy will naturally be less with partial annuitization or with a deferred annuity with surrender charges. But for conservative spenders where the payout rate from the annuity is higher than the initial withdrawal rate, with partial annuity use there is less pressure on the portfolio in the early retirement years. This allows non-annuity assets to grow more over time as mortality credits reduce the need to spend these other investment assets. The remaining investment assets may eventually grow to catch up with where an investments-only strategy would have been at about the life expectancy. Beyond that age, the increasing role for mortality credits allows the partial annuity strategy to get further ahead with legacy compared to an investments-only strategy. When retirement is short, partial annuity strategies often lead to a smaller legacy, though the remaining legacy from investment assets is still reasonably large. For longer retirements, partial annuity strategies provide sound spending support while also fortifying a larger legacy. By requiring less assets to meet spending, risk capacity increases and the withdrawal rate from remaining assets decreases. Non-annuity assets can grow with less sequence risk, creating better long-term opportunities for legacy. Short-term sacrifice supports long-term gain.

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