Variable annuities are often sold with guaranteed living withdrawal benefits, sometimes known as the GLWB or other similar acronyms. In a nutshell, these benefits give you a way to stay invested in the stock market with some income guarantees in place. These benefits became popular after the market crash of 2008 when people were looking for a way to protect their retirement savings from market loss.
In theory, these benefits may sound good, but they can be very costly, and in many cases, it’s the insurance company who might be coming out ahead. Here is what you need to know about the methods used to calculate these benefits so that you can decide for yourself: checkmate, stalemate, or just a losing proposition?
WHAT EXACTLY IS A GLWB?
People retiring without a guaranteed pension may want a way to guarantee that their money won’t run out while they are withdrawing an income from their investments. Different types of annuities offer different types of add-on benefits that, for a fee, can guarantee that you don’t run out of income no matter how long you live. One kind of add-on benefit for variable annuities is a rider option known as a Guaranteed Living Withdrawal Benefit rider. The GLWB guarantees that you can withdraw a certain amount of money for your income based on a percentage value of your benefit base. The way these products are sold is through the guarantee of a certain growth rate—typically between 4 and 8 percent—of that benefit base. The idea here is that the longer that base account is allowed to grow, the larger your future income will be.HOW DOES A GLWB REALLY WORK?
While it makes perfect sense that the larger your benefit base grows, the larger your income amount will be, the terms of this agreement aren’t always understood. Most people think their money is growing at this guaranteed rate, but what is really growing is a type of fake account. When you elect to purchase a GLWB rider, a separate account is created to calculate your benefit base. This separate account is often described as Monopoly money because it may not have any real cash value. You may not access this account value by surrendering the contract, and the benefit base itself may not be available for cash withdrawals. The insurance company simply uses this account value as a benefit base against which you may take out withdrawals.WHY WOULD I WANT A GLWB?
GLWB are typically sold with variable annuities. Mature investors who want to stay in the stock market during retirement are often sold variable annuities because they can give investors two things: a chance for upside growth and a guaranteed floor. The GLWB typically guarantees such that if your actual account runs out of money, the income benefit will continue to be paid. This might be a good deal if you live past age 90, but the terms of the GLWB come with many restrictions, and failing to comply could terminate the guarantees. An annuity is the only type of investment vehicle that can turn your retirement savings into a reliable stream of income, but there are many different types of annuities. The indexed annuity is another type of deferred annuity that can grow your money for a period of time while also guaranteeing income payments. These annuities offer income riders such as the Lifetime Income Benefit Rider (LIBR), for example, that can guarantee an income payment throughout your lifetime, but without direct exposure to the market, and for a much lower fee.HOW MUCH DOES A GLWB COST?
While the exact cost and terms of an annuity depend on the insurance carrier and the terms of the contract, generally speaking, the fees inside a variable annuity are some of the most expensive in the industry. One GLWB contract we looked at recently had an M&E mortality and expense fee of 1.3 percent of the account value plus another 0.90 percent for the GLWB. However, after five years, the rider fee was increased to 1.65 percent, which brought the cost up to 2.95 percent. There was also a 0.15 percent hospital/nursing home feature, and the fees for the underlying market investments (expense ratios) which ranged from 0.42 percent to 1.59 percent. That put the total cost of this particular GLWB at 3.90 percent annually. These fees are ongoing, and they continue even after that guaranteed growth rate is gone. Paying nearly 4 percent in fees puts a real drag on the ability of your accounts to earn returns. If your goal is to get an income while also earning a return that keeps up with inflation, a deferred annuity without an income rider might be a better way to meet your goals. Benefit riders are complicated, and in our experience, not even all advisors understand how they work. To find out if a GLWB is worth the cost in relation to your retirement goals, have your situation analyzed by one of our retirement planning experts. We’re happy to test the different benefits and rider features to help you secure the highest amount of income for the lowest cost. Schedule your complimentary portfolio review today.
