Combining a variable annuity with a lifetime guaranteed minimum withdrawal benefit and a traditional investment portfolio can increase a worker’s retirement income.

Analysts at Ibbotson Associates, a unit of Morningstar Inc., Chicago, make that argument in a paper prepared for Nationwide Financial Services Inc., Columbus, Ohio, a VA manufacturer.

Investors who want VA GMWB riders pay annual fees to keep the protection in force. When investors have the riders, any contract value remaining at death goes to the beneficiaries, the Ibbotson analysts write.

The analysts studied the effects of adding VA contracts with GMWB riders to traditional retirement portfolios by using Monte Carlo simulations to learn what might have happened between 1975 and 2006 and during other similar periods if an investor had put all assets in a traditional diversified mutual fund and what might have happened if the investor put 10% or 25% of the assets in a VA contract with a GMWB rider.

Over the periods studied, combining a VA contract with a GMWB rider and a diverse mutual fund probably would have generated higher average income than the other 2 options would have generated, the Ibbotson analysts report.

Over the 1979-2006 period, for example, using a conservative model portfolio and combined portfolios, an investor who started with 100% of $1 million in assets in a traditional mutual fund might have ended up with $1.7 million in assets, while an investor with 40% of the assets in a VA contract with a GMWB rider might have emerged with $2.1 million in assets, the analysts write.

The analysts assume an annual fee of 3% on VA assets along with conservative to moderately conservative investments for the non-annuity portion.

In the analysis, the analysts do “not consider the default risk in VA contracts,” the analysts note in a discussion of their work. “We believe this risk is very small.”

In addition, the average return from using a VA contract with a GMWB rider appeared to be smaller over shorter retirement spans, the analysts write.

A copy of the analysis is available