Guaranteed lifetime withdrawal benefit riders

A guaranteed lifetime withdrawal benefit (GLWB) is an optional rider on a deferred annuity that lets you withdraw a set percentage of a guaranteed "benefit base" every year for life, even if the account value falls to zero. You keep ownership of the account, unlike with annuitization, but you pay an annual fee for the guarantee and must follow the rider's rules on withdrawals. The benefit base is not cash you can take out; it only determines the size of the guaranteed payments.

How a GLWB works

1. You buy an annuity with the rider, usually a variable annuity, a fixed indexed annuity or a RILA, and put in a premium.
2. A benefit base is set equal to the premium. In many contracts it can grow during the deferral period through a roll-up (a stated yearly percentage), through "step-ups" that lock in higher account values on anniversaries, or both.
3. You choose when to start withdrawals. The annual withdrawal percentage generally rises with your age at the first withdrawal, and may be lower for joint (two-life) coverage than for one life.
4. Each year you may withdraw up to that percentage of the benefit base, treated as a withdrawal from the account. If markets are poor and the account is exhausted, the insurer keeps paying the same amount for life.
5. Withdrawals above the allowed amount usually reduce the benefit base by more than the dollars withdrawn, sometimes dramatically.

FINRA explains that living benefit riders can offer lifetime payments without annuitizing and are sold at an additional cost.

A hypothetical example

Say a 60-year-old puts $200,000 into a variable annuity with a GLWB. Suppose the contract has a 5% roll-up for ten years, a 5% withdrawal rate at age 70 and a 1% yearly rider fee on the benefit base. These are illustrative numbers, not any company's terms.

• The benefit base after ten years of roll-up would be about $325,000 (compounding 5% on $200,000).
• At age 70, the guaranteed withdrawal would be 5% of $325,000, or about $16,250 a year.
• The account value, meanwhile, depends on markets and on fees. It might be $250,000, or it might be $150,000, and the fee has been charged on the larger benefit base all along.

The benefit base grows even if the account falls, which is the point of the guarantee, but the rider fee also grows with it. The growth is a contract formula, not an investment return, and the account value is what remains for your heirs.

The case for a GLWB

• It gives lifetime income with continued access to the account, so you can leave something to heirs if markets do well.
• It addresses sequence-of-returns risk: poor markets early in retirement do not reduce the guaranteed payment.
• For people who would otherwise not annuitize, it can make spending easier to commit to.

The case against

• The fees are significant and continue every year whether or not you ever need the guarantee. See annuity fees, explained.
• The guarantee is only as good as the insurer. Check state guaranty limits.
• Rules are complicated: excess withdrawals, investment restrictions that limit upside, and changing terms on new contracts as interest rates change.
• Compared with a plain income annuity, the guaranteed payment can be lower for the same premium, because you keep control of the account.
• Surrender charges may apply while you hold the contract (annuity surrender charges and free withdrawals).

Who tends to use one, and who should skip it

A GLWB is aimed at people within about ten years of retirement who want a floor of lifetime income, expect to need the money gradually rather than all at once, and want to keep some market exposure and a possible legacy. It suits those who are uneasy about handing a lump sum to an insurer under a pure income annuity and who will hold the contract long enough for the benefit base to matter.

It tends to suit poorly a buyer who may need large lump sums, one who expects to start withdrawals soon with a short deferral (so roll-ups do little), one with a pension and Social Security that already cover essential spending, and one who is mainly attracted by a headline roll-up rate. The roll-up is a formula for the benefit base, not a return on your money, and sales material that blurs the two is a common source of complaints. If a seller emphasizes the "guaranteed 7%" or a similar figure, ask what it applies to and whether you can ever withdraw that amount as cash.

Questions to ask before you buy

• Is the roll-up simple or compounding, and does it stop when withdrawals begin?
• What is the withdrawal percentage at each starting age, single and joint?
• What is the fee, what is it charged on, and can it increase?
• Which investments are required or restricted while the rider is active?
• What happens to the benefit base if you take more than the allowed amount, and what happens to the rider at the spouse's death?
• What happens on death: do beneficiaries receive only the account value?
• Compare the guaranteed payment with an immediate annuity quote from the annuity payout calculator to see what the extra flexibility costs.

Tax treatment

Withdrawals from a non-qualified contract are taxed as earnings first (see how annuities are taxed), so lifetime payments from a rider can be fully taxable income until the gain is exhausted. In an IRA, the whole payment is taxable.

Key takeaways

• A GLWB guarantees lifetime withdrawals from a benefit base, not from your account value.
• The benefit base can grow through roll-ups and step-ups, but you cannot cash it out.
• Rider fees are charged every year, usually on the benefit base, and reduce the account.
• Excess withdrawals can sharply cut the guarantee, so follow the contract's limits.
• Compare the guaranteed income to a simple income annuity before paying for flexibility you may not use.