The riders initially promised to at least return the customer’s money to him over a period of years, but many have morphed into riders that provide a fixed withdrawal rate for life. They may promise, for example, the ability to take 4 percent withdrawals forever, or maybe base the withdrawal level on attained customer age – 5 percent if you’re in your 60s or 6 percent if you’re in your 70s.
For the cost of the rider, the customer buys peace of mind with the knowledge that regardless of how poorly the investment side of the VA does, selecting a GMWB assures a lifetime income and greater flexibility than choosing to annuitize the policy. However, if you’re looking for strong income guarantees, they are available at little or no extra charge with fixed annuities.
Fixed annuities offer minimum rate guarantees that provide assurances of higher lifelong income. For example, a GMWB may give an 85-year-old a 7 percent income for life. But a fixed annuity with only a guaranteed minimum 1 percent interest rate on the premium would provide a withdrawal rate equal to a 17 percent income for the consumer’s life expectancy (based on United States Life Tables 2002). This is based on life expectancy, not lifetime, but I’m only assuming that you earn 1 percent interest (picking an annuity with a 3 percent minimum rate would see that octogenarian past the century mark with a significantly higher income than the GMWB would provide).
Based on life expectancy, the same 1 percent fixed annuity minimum guarantee provides a 65-year-old with a 6 percent income and a 75-year-old with a 9 percent income. Of course, we hope the fixed rate or fixed index annuity does better than the contract minimum. If the fixed annuity averaged even a 4 percent or 5 percent yield, the consumer would receive a still higher income (and possibly provide a greater legacy to beneficiaries).
To provide even more assurances, some fixed index annuity carriers have begun offering GLIBs – guaranteed lifetime income benefits (a wonderful term coined by Sheryl Moore of annuityspecs.com) – which take away all uncertainty and guarantee withdrawal income for a lifetime. The cost of these added benefits is lower than the VA equivalents because the fixed annuity minimum guarantee already provides much of the income, and you still get income flexibility because you are not annuitizing.
For a consumer more interested in guaranteed retirement income, rather than protection from market risk, fixed annuities may be the better choice. Variable annuity GMWB riders take away much of the investment risk of owning a variable annuity by providing income guarantees. However, if the actual consumer goal is maximizing secure retirement income, fixed annuities have an advantage because they already offer minimum guaranteed returns without market risk. These minimum guarantees assure the fixed annuity’s value is steadily rising, and these guarantees provide for a strong future income.