Key Takeaways
- Guarantees lifetime income despite account depletion.
- Benefit base determines guaranteed withdrawal amount.
- Withdrawals up to limit don’t reduce guarantee.
- No need to annuitize; retain asset control.
What is Guaranteed Lifetime Withdrawal Benefit (GLWB)?
A Guaranteed Lifetime Withdrawal Benefit (GLWB) is a rider added to certain annuity contracts that ensures you can withdraw a guaranteed income for life, regardless of market fluctuations or account depletion. Typically attached to variable annuities, GLWBs protect your retirement income by providing lifetime withdrawals even if your account value drops to zero.
This feature offers a blend of growth potential through investments and income security, making it a valuable tool for managing longevity risk in retirement.
Key Characteristics
GLWBs have distinct features that make them appealing for retirement planning:
- Lifetime Income Guarantee: Ensures you receive periodic withdrawals for life, protecting you against outliving your savings.
- Benefit Base: A notional value used to calculate withdrawals, which can increase with market gains through step-ups, independent of actual account value.
- Variable Account Value: Your premium grows or declines with market performance, offering liquidity unlike fixed income annuities.
- Withdrawal Flexibility: You can access funds up to the guaranteed amount without annuitizing, maintaining control over your assets.
- Fees: GLWB riders charge an annual fee, often a percentage of the benefit base.
- Joint Coverage: Some contracts provide spousal continuation, extending income guarantees to your partner.
How It Works
When you add a GLWB rider, your annuity’s benefit base is established, often equal to your initial premium. This base can increase annually if your investments perform well, thanks to step-up features.
You begin lifetime withdrawals after a waiting period, with annual payouts calculated by multiplying the benefit base by a payout rate that varies by age and contract terms. If your account value falls to zero, the insurer continues payments, ensuring guaranteed income.
Withdrawals above the guaranteed amount reduce the benefit base proportionally, which can lower future income. Unlike annuitization, you retain access to your remaining account value, providing flexibility.
For example, you might invest in funds like Vanguard Dividend Appreciation ETF (VIG) or iShares Core S&P 500 ETF (IVV) within your annuity to pursue growth and potential step-ups.
Examples and Use Cases
GLWBs are valuable for retirees seeking stable income without sacrificing investment upside:
- Retirement Income: You can use a GLWB to secure withdrawals in retirement, balancing market risk and income needs.
- Market Volatility Protection: Even during downturns, like those affecting bonds such as Vanguard Total Bond Market ETF (BND), your guaranteed income persists.
- Spousal Benefits: Couples can select joint GLWB riders to ensure lifetime income continues for surviving spouses.
- Legacy Planning: Unlike immediate annuities, GLWBs allow some remaining account value to pass to heirs if you do not exhaust withdrawals.
Important Considerations
While GLWBs provide valuable income guarantees, they come with costs and trade-offs. Annual rider fees reduce your account value over time, so you should evaluate whether the protection aligns with your retirement goals.
Withdrawals beyond guaranteed amounts reduce future income, so it’s important to plan withdrawals carefully. Also, varying payout rates and fees across products mean you should compare options and understand terms before adding a GLWB rider.
Final Words
A Guaranteed Lifetime Withdrawal Benefit ensures steady income regardless of market downturns, providing valuable retirement security. To make the most of this feature, compare GLWB riders across annuity providers and run personalized projections to assess their impact on your long-term income.
Frequently Asked Questions
GLWB is an optional rider added to annuity contracts that guarantees you a stream of lifetime income through periodic withdrawals, even if your annuity’s account value drops to zero due to market losses or withdrawals.
GLWB is attached to a savings annuity like a variable annuity where your account value can grow based on investments. It uses a benefit base to calculate guaranteed withdrawals, which can increase over time, providing income even if the account value falls.
The benefit base is a separate value used to determine your guaranteed withdrawals. It usually starts as your initial premium and can increase through 'step-ups' if your account value rises, protecting your income guarantee from market declines.
Withdrawals are based on your benefit base multiplied by a payout rate, which typically ranges from 4% to 6% and increases with your age when you start withdrawing. This amount is guaranteed for life, even if your account value reaches zero.
You can withdraw more than the guaranteed amount, but doing so will reduce or cancel your GLWB benefit proportionally. Staying within the guaranteed withdrawal limit preserves your lifetime income stream.
No, GLWB does not require you to annuitize your contract. You maintain control over your assets and can make withdrawals without converting your principal into fixed payments.
For joint lives, such as spouses, payout rates are generally lower and based on the younger individual's age, but payments continue for the surviving spouse, providing income for both.
Yes, GLWB riders typically charge an annual fee, which covers the cost of guaranteeing lifetime withdrawals regardless of market performance or account depletion.
