Page 14 - Investment Advisor June 2023

ReTIRemenT/AnnuITIeS PlAnnInG

By Roger Wolhner

Where do Annuities Fit in your

Clients’ retirement strategy?

experts zoom in on some key annuity issues at this year’s

morningstar conference.

nnuities can play a number of
roles in your client’s retirement
A income strategy. However, there
is often a degree of confusion among advi-
sors and their clients about if and how to
use annuities. At the recent Morningstar
Investment Conference, annuity experts
Wade Pfau and Spencer Look spoke with
Aron Szapiro, Morningstar’s head of gov-
ernment affairs, about a number of these
concerns and offered ideas as to how
annuities can fit in as part of a diversified
retirement investment portfolio. account balance in much the same fash- the annuity could be used to build a
Look, associate director of retirement ion as the other assets they manage for protected income floor and create a
studies at Morningstar, offered an over- the client. Szapiro guided the discus- framework for investing toward more
view of the two main ways annuities pay sion toward retirement income styles, discretionary goals.
out: deferred annuities, which have an or strategies, and their accompanying
account balance, and income (or immedi- tradeoffs — real or in the client’s mind. sellInG Bonds to Buy AnnuItIes
ate) annuities. Both types can be utilized Pfau addressed several things that advi- As noted by Pfau and reiterated by Look,
to provide a stream of retirement income. sors should consider with their clients. it generally makes more sense for inves-
One of the main issues with income For one, “the idea of a tradeoff between tors to trade bonds for an annuity rather
annuities, Look noted, is that once the meeting a spending goal versus not being than to liquidate stocks to purchase an
money is annuitized, it can be hard able to provide a legacy” is misguided, annuity. “If you’re getting an annuity for
to get that wealth out of the contract. he said. “With the conversation around income purposes, it’s really going to be
Deferred annuities also can offer a num- annuities, it’s important to remember it’s an effectively fixed income asset class
ber of riders for things such as long- not all or nothing,” he said. “It’s not, ‘Do I exposure in your overall portfolio,” Look
term care, guaranteed death benefits put everything in the annuity or do I put said. “It’s important to recognize that
and lifetime withdrawals. everything in investments?’” and use a portion of the bond portfolio
The discussion moved to annuities Speaking of tradeoffs, Pfau added that to buy the annuity and to reflect that in
geared to fee-only and fee-based advi- investors should think about annuities as future portfolio rebalancing.”
sors. Pfau, who focuses his research on a fixed income replacement. “You’re not Pfau added that if an investor is selling
the Retirement Income Style Awareness necessarily selling stocks with a risk pre- stocks to purchase an annuity, they might
profiling program, explained that annu- mium to purchase the annuities; you’re be sacrificing the opportunity to build
ities have traditionally been commis- trading bonds for annuities,” he explained. a legacy for their heirs. Selling bonds to
sion-based, but he has seen a trend in “That sort of context really leads to fund the annuity purchase allows them to
recent years toward annuities that have this idea that there are different viable keep the overall stock allocation the same
stripped the commissions out. strategies out there for how people can for their household balance sheet.
This is more prevalent with deferred approach retirement, whether it’s with a The panelists also addressed some of
annuities with an account balance. Some total return investing strategy, a bucket- the many academic studies on annuities.
issuers have created a framework where ing strategy or a strategy that might fill Look mentioned that a number of these Adobe Stock
advisors can charge a fee on the annuity an income gap,” Pfau said. For instance, incorporate consumption smoothing, both

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