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Is A Variable Annuity with GLWB Worth the Cost?

In “Demystifying Variable Annuities,” Bank Investment Consultant’s David Blanchett explains why a variable annuity with a guaranteed lifetime withdrawal benefit (GLWB) is worth looking into.  The GLWB is often referred to as a GMWB, or guaranteed minimum withdrawal benefit.  This optional rider guarantees that you will receive a lifetime income stream, leaves your remaining account balance as a death benefit when you pass, and gives you the potential for increasing payments if the markets are up.  Variable annuities also have a lot of complexities to them, so it is crucial that you and your advisor know their inner workings and know exactly what investment you may choose.

The amount of your income stream depends on the benefit base of your invested assets, your age at distribution, and a preset percentage called the lifetime distribution factor.  If you are buying an annuity with a spouse, your distribution factor will be based on the age of the youngest person.  Each annuity provider offers a different percentage, but a single 65 year old’s would be around 5% and a couple where the youngest spouse was 65 would get around 4.5%.  In order to determine how much income you will receive yearly, your distribution factor is multiplied by your highest benefit base amount.

While you might get higher yearly payouts if your benefit base increases in a given year, your payouts will not be lower than your initial amount.  Even if your account balance goes to nothing because the markets tank, you will still receive income based on your highest benefit base amount and your distribution factor.  Three different fees are commonly associated with variable annuities that have GLWB riders.  These fees help the insurance company pay out your money, even if your benefit base went down to nothing.  A rider fee, general administrative fees, and investment fees are the main types.  They typically cost between 150 and 300 basis points for your variable annuity with a GLWB.

People definitely have mixed emotions about whether annuities are worth it, especially variable annuities.  Some research has shown that a GLWB rider is worthwhile to you if the variable annuity’s underlying portfolio can’t sustain the withdrawal amount any more and one or both of the annuitants is alive when the account balance comes down to zero.  It’s not highly likely that you will need your GLWB rider, but the cost is relatively low compared to the guarantee it offers you if you do need it.  Another benefit of the GLWB rider is that you can afford to take on much more risk within your variable annuity.  It’s typically in your best interest to allocate funds to the riskiest investment that the insurance company will allow, even though they usually put some type of cap on the earnings.

Variable annuities with GLWB’s work for many investors.  Although they are not typically a liquid investment and your payouts could be compromised if you don’t invest with a strong company, they are good products for investors who understand their inner workings.  As with all annuities, you never want to put all of your eggs in one basket when it comes to planning your retirement income strategy.  The guaranteed lifetime income offered is a big benefit for retirees worried about outliving their savings.  Look more into these products if you think they might be right for you.

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