One year ago, the first index annuities offering guaranteed lifetime withdrawal benefits were introduced. By the spring of this year a majority of top indexed carriers were offering GLWBs on at least some of their annuities, and almost all of the fixed carriers I consult with were developing GLWBs for their own products.
Looking further, I discovered that a majority of the top-selling variable contracts were now also offering GLWB riders. Why the interest in GLWBs, and why now?
The “why now” stems from insurance companies trying to transition to meet the retirement needs of the boomer generation, which include both a need for income and a need for freedom. GLWBs offer a payout that is guaranteed for life, and that should be attractive to folks in or approaching retirement. In addition, a GLWB preserves access to assets; an annuity owner can surrender his contract at any time and receive the net value of the account.
The “why” is GLWBs attempt to overcome two distinct problems with current retirement income solutions.
Many financial advisors suggest withdrawing an inflation-adjusted 4 percent of a retiree’s financial assets each year to produce retirement income. The reason is if you plug that withdrawal rate into the historical performance of the markets, and also use historical inflation rates, the retiree’s assets will very likely last for 30 or 35 years. But what if history doesn’t repeat and the retiree runs into a prolonged bad patch of low returns? The money could run out much sooner. Using actual history as a guide, a 4 percent withdrawal rate doesn’t always last 30 years.
Alternatively, a senior could buy an immediate annuity with a lifetime payout. A person in his 60s could get a payout rate of around 8 percent and perhaps over 9 percent if in his 70s.