GMWB = Guaranteed Minimum Withdrawal Benefits
GLWB = Guaranteed Lifetime Withdrawal Benefits
OK. A Variable Annuity with the above riders may be considered for a retiree or future retiree who needs a lifetime income above and beyond social security, pensions and other investments/savings but guess what? These GMWB and GLWB features cost money (slightly less than 1% per year, depending on the insurance company).
Is it worth it? You give the insurance company a certain amount of your nest egg and they, in turn, promise to let you take a percentage (often 5% per year) of your funds for the rest of your life. Aren't they nice? Of-course, some of the money you get back may be your own and not what the funds have earned in interest and gains.
This satisfies two important risks: (1) the risk of you outliving your money and (2) the risk of bad market performance.
But there are disadvantages, too:
(1) All the money from these guaranteed withdrawals comes out as taxable ordinary income
(2) You no longer have access to your original amount (only 5% per year) without substantial penalties. You should not do this if you think there is a possibility that you may need these funds.
(3) You have protection against withdrawal reductions but no guarantee that your withdrawals will keep up with inflation. They may if the income base that is used to calculate the 5% withdrawal increases. (Some policies guarantee that this income base doubles in 10 years but remember, that is not the account value but only how the 5% withdrawal is calculated).
(4) Confusing? Yet another reason to pause. You must understand the mechanics, with your planner's help if needed, before investing.
(5) That cost (referred to above of less than 1%) for this guaranteed withdrawal feature reveals, according to Jonathan Guyton (Financial Planning Journal, February 2010 issue), that this could result in a benefit that is 10%-30% less than the benefit of safe withdrawal rates from your own portfolio of investments.
Based on several studies, you MAY BE ABLE TO keep your money invested on your own and forget about Variable Annuities if:
(1) You follow asset allocation guidelines (Buckets of Money(r) strategies by Ray Lucia (r); and comments in these blog postings under "Portfolio Allocations" and "Retire-Distribution")
(2) You are wealthy and do not face longevity risk (running out of money)
(3) Your "income gap" (the additional amt. needed from your investments is less than 4%/yr)
(4) Leaving a bequest to heirs is more important than enhancing your own retirement income
An Introduction
Hi. Welcome to BourGroup and my blog. Phil
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.