Page 28 - Investment Advisor February/March 2023

Cover Story

The efficiency of annuities is

worth extra consideration.

One of the most frequently overlooked facts about annuities
is that they can generate income more efficiently than a tra-
ditional fixed income portfolio, according to Shannon Stone,
lead wealth advisor at Griffin Black Inc. This is because of
the mortality crediting and risk pooling that is built into
annuity products — features a fixed income portfolio simply
cannot deliver.
Depending on the circumstances at the time, a given client
can gain between 10% and 40% more efficiency in funding
retirement income via a low-cost annuity versus a traditional
fixed income portfolio, says DPL’s David Lau. This excess
income-generating efficiency built into annuities is well
understood and appreciated by academics and insurers, but
not necessarily by advisors, Lau adds.
In Stone’s experience, the emergence of commission-free
annuities and scalable platforms to distribute them has
completely changed the annuity landscape for fiduciary
financial advisors. Another key factor is the emergence of
annuity solutions that leverage “income riders” in the place
of true annuitization.
PGIM’s David Blanchett points out that, in today’s annuity
marketplace, many of the products are designed not as true
annuities but rather as vehicles that can continue to support
accumulation and in which the investor retains the ability to
access their principal.
“The benefit of this approach is that the client doesn’t lose a retirement strategy
control of the assets or completely lose out on their principal with 50% in U.S. stocks and
if they die early,” Blanchett explains. “As the person ages and 50% in government bonds would have survived each 30-year
continues to draw income, the principal balance will eventu- period in the U.S. historical record from 1926 to 1991, so long
ally fall to zero, but the individual will nonetheless continue as the asset owner withdrew no more than 4% per annum
to draw income from the annuity. This is yet another way that during that period.”
annuities can outshine a traditional fixed income approach as That is a very useful piece of information to know, Stone
the basis of retirement income.” says, but it is not a “retirement income plan.”
Many clients will be much better served by a retirement “Simply put, the 4% withdrawal rule was never meant
strategy that utilizes annuities and a dynamic approach to to be a real retirement plan,” Blanchett agrees. “It is meant
making withdrawals as opposed to following a traditional to be a guideline for the use of a portion of your retirement
rule of thumb — for example, the seemingly ubiquitous 4% assets — the 401(k) plan or individual retirement account.
rule, say Blanchett and Stone. According to the duo, the 4% Far too many advisors and clients are using this as their
withdrawal rule represents one of the most misunderstood income plan.”
and misinterpreted pieces of common wisdom in the world of As Stone emphasizes, in the real world, retirement income
financial planning. planning is scary for clients who have spent a working life-
As Blanchett points out, the rule itself is merely a math- time accumulating assets and watching their account bal-
ematical framework that suggests a given individual in retire- ances grow. It makes sense that they would gravitate towards
ment should add up all of their investments and simply plan an easily digestible rule of thumb that promises a measure
to withdraw 4% of their total wealth during their first year of of safety.
retirement, with the withdrawal amount then being adjusted Stone and Blanchett suggest advisors often gravitate to the
annually to account for inflation. rule for this same reason: the projection or idea of safety.
“When the rule was first put forward it represented a “The rule gives advisors an easy way to speak with their
novel and interesting analysis,” he says. “It demonstrated that clients about the market roller coaster they are likely to expe-

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