It turns out the retirement industry was indeed onto something when it started adding a guaranteed minimum withdrawal benefit (GMWB) rider to variable annuities a couple years ago. A new report by Ibbotson Associates has found that adding a variable annuity with a lifetime GMWB rider to a traditional stock and bond retirement portfolio can increase income while decreasing income risk.

Total assets under management for variable annuity accounts at the end of 2006 reached $1.36 trillion, an increase of 38.2% since the end of 2001, Ibbotson says–with GMWB being the dominant sales driver for variable annuities in recent years.

The Ibbotson research report, titled Retirement Portfolio and Variable Annuity with Guaranteed Minimum Withdrawal Benefit, examined two types of income risk–both the risk of a portfolio’s income stream declining from one year to the next and the risk of a shortfall. According to Ibbotson, a GMWB rider for life gives investors the ability to withdraw a fixed percentage (for example, 5%) of the benefit base each year until death. “The benefit base can rise annually when the market has performed well, but will not fall,” the study found. “So investors are protected against any nominal investment losses in a down market without losing the benefit of upside gain in a strong market,” the study says. In exchange for this benefit, the study says, “the investor pays a fee each year, and the remaining contract value at death is paid to beneficiaries.”

To test the costs and benefits of adding the VA and GMWB riders to traditional retirement income portfolios, the study’s authors performed a series of simulation analyses across three investment scenarios: a diversified asset allocation variable annuity with GMWB; a diversified traditional non-annuity portfolio, such as mutual funds; and a combination of a variable annuity with a GMWB and traditional non-annuity product.

Here’s what the study results showed. “Empirical results using historical returns and Monte Carlo simulations showed that the combined portfolios had higher average total income return and total income withdrawals as well as lower negative income return over a 30-year retirement period,” the authors found. “These results make sense intuitively,” the study says, “because a variable annuity with a GMWB has no income risk–the income benefit base will not decrease, even if the market goes down.” They continued: “This guaranteed income protection allows the investor to allocate assets to a more aggressive variable annuity, leaving the overall portfolio with a higher equity allocation. More equity contributes to an increase in total income while the guaranteed income from the withdrawal benefit rider helps lower the overall income risk for the combined portfolio.”

Give me some kind of a guarantee

A study commissioned last year by NAVA, the Association for Insured Retirement Solutions, and performed by Mathew Greenwald & Associates, Inc., found that a majority of Americans’ fear of investment risk is undermining their confidence to invest in the stock market. But those fears abated somewhat when the benefits of guaranteed living benefits like the GMWB were explained.

The survey, which polled 1,000 Americans between the ages of 55 and 80 who had at least $75,000 in investable household assets, found that 69% of those who would consider putting their money in the stock market would pay 1% of their investment per year for guaranteed withdrawals of 7% of the investment per year until the total investment was received, guaranteeing that they would never lose any money on their investment; 67% of those who would consider putting their money in the stock market said they would pay 1% of their investment per year for the guarantee that, if they kept the investment for five years, they would never lose any of their investment and would receive all market gains; 59% of all respondents stated that the risk of losing money over the next five to 10 years is a very important factor in their decision about how much to invest in the stock market; and 54% of all respondents say they would be likely to invest more in the stock market if they were guaranteed they could invest in the market with the possibility of high gains and no risk.

“Variable annuity living benefits offer these individuals sufficient protection to invest in the market and potentially build a larger nest egg for retirement,” said Greenwald in a statement. Mark Mackey, president and CEO of NAVA, (who recently resigned his post) said in the statement that this study “clearly demonstrates that a cross-section of Americans headed toward or already in retirement are willing to pay a small percentage of their investment to insure against downside market risk.”

Washington Bureau Chief Melanie Waddell regularly covers retirement, legislation, and other issues. E-mail her at