Variable Annuities With GLWB
That stands for guaranteed lifetime withdrawal benefit. Have you heard of these? You’ll also find this popular contract rider with some equity-indexed annuities. Before I did some deep analysis, I constantly had clients telling me that it sounded too good to be true. Well, it is in a lot of ways.
As an agent, it sounded great! In this type of contract, the income benefit is generally guaranteed to grow at 7% annually. When withdrawals begin, the contract owner receives a guaranteed income of 5% of the income benefit value for life, regardless of actual account performance. With this product, I was essentially off the hook in regards to account management. No matter what, my client would get 7%. Boy oh boy, life is easy now!
Not so fast. Did you read that last paragraph carefully? If it sounds too good to be true, you’d better take a second look. I’ll save you the trouble and just explain what’s going on here. There’s a big difference between the income benefit and the account value. Let’s define those:
Income Benefit- This equals the initial investment plus the guaranteed interest rate, compounding yearly until withdrawals begin. $100K invested today will grow to $200k in ten years, assuming 7% interest.
Which doesn’t mean that’s how much money you have…
Account Value- This is the actual value of the account as it performs in the open market, less annual fees, which can exceed 3%.
So, the income benefit is a guaranteed $200K but as far as the account value goes, your guess is as good as mine. It may be more or less. With a 3% annual fee, the account must gain at least 10% to keep up with the guaranteed income benefit. Has the market ever done that? Have you ever seen the market hit exactly 10% annually for ten straight years? It has not. The market has done better and it has done worse. Sounds kind of like rolling the dice. Thank God for that GLWB.
How good is that guarantee, really? Our $100K will guarantee a lifetime income of $10,000 per year in ten years.(5% of $200K) In all honesty, that’s a paltry payout compared to other income products.
With an immediate annuity, it would only take about $134K to equal the GLWB payment for a 60 years old male. For a joint life payout, you would need a little over $153K. You would need to earn roughly 3% and 4.5% respectively to compete. That sounds a lot easier to me.
At age 60, immediate annuities pay around 7.5% for a single life and 6.5% for a joint life payout. That means it takes a lot less money to guarantee a higher level of income in the future.
Another plus for immediate annuities is that the income rate goes up with each year of age. If you wait until age 61 to begin payments, the level of income will be a little bit higher. The GLWB will generally increase the payout to 6% at age 70. By that time, the immediate annuity would pay about 9.3% for a single life and 7.5% for the joint life option.
The GLWB never catches up. So why is this type of product so heavily sold? My guess is that many advisors are in the same position as I was. When a client buys into the income guarantee, they usually feel a sense of relief and the advisor looks like a hero. A better advisor would do some in-depth analysis to find other options with higher income potential. After all, you’re in it for guaranteed income, right?
Also, use of the GLWB annuity is commonly seen as a way to stay in the market with a great safety net. I already showed you how it only takes a 3-4.5% investment return to get an equal payment. With the heavy fees, any market gains are seriously watered down.
My advice: if you want to stay in the market, stay in the market but without the annuity. I know this is unlikely to give me more business now but it’s more ethical advice. The potential for good investment returns is much higher without the fee structure of the variable annuity. That income guarantee isn’t free, by the way.
If you want to guarantee future income right now, find someone who is willing to work to give you a few more options. Educate yourself and find an advisor who is worth his salt. But first, read the whole GLWB report. That actually is free.
As an agent, it sounded great! In this type of contract, the income benefit is generally guaranteed to grow at 7% annually. When withdrawals begin, the contract owner receives a guaranteed income of 5% of the income benefit value for life, regardless of actual account performance. With this product, I was essentially off the hook in regards to account management. No matter what, my client would get 7%. Boy oh boy, life is easy now!
Not so fast. Did you read that last paragraph carefully? If it sounds too good to be true, you’d better take a second look. I’ll save you the trouble and just explain what’s going on here. There’s a big difference between the income benefit and the account value. Let’s define those:
Income Benefit- This equals the initial investment plus the guaranteed interest rate, compounding yearly until withdrawals begin. $100K invested today will grow to $200k in ten years, assuming 7% interest.
Which doesn’t mean that’s how much money you have…
Account Value- This is the actual value of the account as it performs in the open market, less annual fees, which can exceed 3%.
So, the income benefit is a guaranteed $200K but as far as the account value goes, your guess is as good as mine. It may be more or less. With a 3% annual fee, the account must gain at least 10% to keep up with the guaranteed income benefit. Has the market ever done that? Have you ever seen the market hit exactly 10% annually for ten straight years? It has not. The market has done better and it has done worse. Sounds kind of like rolling the dice. Thank God for that GLWB.
How good is that guarantee, really? Our $100K will guarantee a lifetime income of $10,000 per year in ten years.(5% of $200K) In all honesty, that’s a paltry payout compared to other income products.
With an immediate annuity, it would only take about $134K to equal the GLWB payment for a 60 years old male. For a joint life payout, you would need a little over $153K. You would need to earn roughly 3% and 4.5% respectively to compete. That sounds a lot easier to me.
At age 60, immediate annuities pay around 7.5% for a single life and 6.5% for a joint life payout. That means it takes a lot less money to guarantee a higher level of income in the future.
Another plus for immediate annuities is that the income rate goes up with each year of age. If you wait until age 61 to begin payments, the level of income will be a little bit higher. The GLWB will generally increase the payout to 6% at age 70. By that time, the immediate annuity would pay about 9.3% for a single life and 7.5% for the joint life option.
The GLWB never catches up. So why is this type of product so heavily sold? My guess is that many advisors are in the same position as I was. When a client buys into the income guarantee, they usually feel a sense of relief and the advisor looks like a hero. A better advisor would do some in-depth analysis to find other options with higher income potential. After all, you’re in it for guaranteed income, right?
Also, use of the GLWB annuity is commonly seen as a way to stay in the market with a great safety net. I already showed you how it only takes a 3-4.5% investment return to get an equal payment. With the heavy fees, any market gains are seriously watered down.
My advice: if you want to stay in the market, stay in the market but without the annuity. I know this is unlikely to give me more business now but it’s more ethical advice. The potential for good investment returns is much higher without the fee structure of the variable annuity. That income guarantee isn’t free, by the way.
If you want to guarantee future income right now, find someone who is willing to work to give you a few more options. Educate yourself and find an advisor who is worth his salt. But first, read the whole GLWB report. That actually is free.
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