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Annuities as an Asset Class for Fee-Based Advisors l 44 © Envestnet 2022 As for true liquidity in the plan, consider a couple who believes that the 4 percent rule serves as an appropriate guide for their retirement spending. They seek to spend $40,000 per year with inflation adjustments, and they have $1 million invested in stocks or bonds through their brokerage account. Does this couple have any liquidity? Yes, technically, since they do have $1 million of liquid financial assets. But in a meaningful sense, this couple does not have liquidity. They are not free to use that $1 million for other purposes. The full amount must be tied up to support their spending objectives. An investment portfolio is a liquid asset, but some of its liquidity may be illusionary if those assets are already earmarked for specific goals. This distinction is important because there are cases when tying up a portion of assets in something illiquid, such as an income annuity, may allow for the household liabilities to be covered more cheaply than could be done when all assets are positioned to provide technical liquidity. Many real-world retirees end up earmarking more assets than necessary to support income, and therefore spend less than possible because there is no guarantee component with investments, and they worry about outliving their assets. In simple terms, an annuity with lifetime income benefits that pools longevity risk may allow lifetime spending to be met at a cost of twenty years of the spending objective, while self-funding for longevity may require setting aside enough from an investment portfolio to cover thirty to forty years of expenses. The amount to be set aside with investments grows with the longevity risk aversion of the retiree. Because risk pooling allows for less to be set aside to cover the spending goal, there is now greater true liquidity and therefore more to cover other unexpected contingencies without jeopardizing core-spending needs. True liquidity will be larger whenever the payout rate for the annuity is greater than the determined "safe" withdrawal rate from investments as based on the retiree's risk aversion. As this will be the case for risk averse retirees who plan for living longer than average while earning below average portfolio returns, allocating to an annuity to cover an income gap can create more true liquidity for the overall retirement plan. Risk pooling and mortality credits allow for less to be set aside to cover the spending goal, creating greater true liquidity to cover other unexpected contingencies without jeopardizing core spending needs. Liquidity, as it is traditionally defined in securities markets, is of little value as a distinct retirement goal. The distinction between technical and true liquidity is important. Many real-world retirees end up earmarking more assets than necessary to support income, and therefore spend less than possible because there is no guarantee component with investments, and they worry about outliving their assets. It is important to frame the issue of variable annuity fees in terms of the potential value the variable annuity can provide to a retirement income plan. Variable annuities may have higher ongoing charges than non-annuity investment portfolios, but a portion of those fees are to pay for the assurance of a lifetime income in the face of longevity and market risk. Annuities as an Asset Class for Fee-Based Advisors l 44 © Envestnet 2022

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