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.
However, there is a big psychological problem with annuitization. Dr. Meir Statman of Santa Clara University in California says there is a smell of death surrounding the choice, because when you annuitize, you are no longer hoping to build assets to use in the future but instead admitting that you will die in the future.
GLWBs solve both of these problems. The guaranteed lifetime withdrawal benefits not only provide a guaranteed payout, they also preserve hope. Although the original premium may be gone when the owner is, it may not. It may even grow, permitting the owner to both eat his retirement cake and have it to pass to his heirs.
The impact of GLWBs is greater in the variable world than it is in the fixed. Although both fixed and variable GLWBs enjoy the preservation of hope of growth, the variable annuity’s entire value proposition has changed. No longer is a variable annuity simply a “mutual fund in a tax-deferred wrapper,” but a retirement income alternative with guarantees the mutual fund cannot match. A financial planner may charge a 1 percent annual fee to try to manage money to produce an income for the investor’s life, but for a lower fee, the variable or fixed annuity GLWB can guarantee it.
GLWBs usually offer at least a 5 percent initial payout, which is higher than the suggested 4 percent withdrawal rate. These payouts are not indexed to inflation, but almost every fixed or variable annuity offering a GLWB has “step-up” features, meaning any account gains above the withdrawal rate are reinvested to produce higher future income. And on most of the fixed annuities and some of the variable ones, the GLWB payout could be 6 percent or 7 percent as the age at first withdrawal increases.
GLWBs are designed to generate guaranteed income while keeping the hope of preserving assets alive. They are not designed for long-term accumulation nor are they structured to maximize potential income. A combination of financial resources is needed to ensure a successful retirement. But an annuity with a GLWB benefit probably deserves to be a part of that combo.