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Annuities as an Asset Class for Fee-Based Advisors l 45 © Envestnet 2022 Inflation Risk Management and Annuities A common question about annuities relates to inflation protection and whether it should be incorporated into the annuity. We can distinguish between whether the retiree needs the annuity to provide inflation protection and whether the retiree wants the annuity to provide inflation protection. With a lower payout rate, an income annuity providing income growth and inflation protection will require a larger premium to build up the same initial spending power. Alternatively, the same premium amount will buy less initial income when this income grows over time. Obtaining inflation protection means trading less spending early on for more spending later. Likewise, many deferred annuities with GLWBs may offer the potential for step-ups to keep pace with inflation, but retirees should recognize that the probability this will happen could be low as the retirement gets longer. The tradeoff is that with level annuity spending, the remaining investment portfolio must also cover the subsequent inflation adjustments that the level annuity does not provide. Less can go into the annuity initially, leaving more in the portfolio, but the subsequent demands on the portfolio will be greater to also cover the missing inflation adjustment for the annuity portion. As it turns out, the lower withdrawal rate from investments can help assets to grow and to manage sequence risk, such that the higher spending need later in retirement can be more effectively managed. For this reason, I do not think it is necessary to include inflation protection into the annuity. I think that the common concern about annuities not providing inflation protection is framing it as an all-or-nothing decision, rather than recognizing that the annuity facilitates the use of other non-annuity assets as a source of inflation protection. "I think that the common concern about annuities not providing inflation protection is framing it as an all- or-nothing decision, rather than recognizing that the annuity facilitates the use of other non-annuity assets as a source of inflation protection." - Wade Pfau Annuities as an Asset Class for Fee-Based Advisors l 45 © Envestnet 2022

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