You might have heard of a Variable Annuity- but what does GLWB mean?
It stands for guaranteed lifetime withdrawal benefit. You may find the popular GLWB contract rider with some equity-indexed annuities also. Before I did some deep analysis, I constantly had clients telling me that it sounded too good to be true. Well, like many things that sound too good to be true, this one probably is.
From a limited perspective as an agent, it sounded great- An annuity owner's 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.
Income Benefit is NOT 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%.
Account Value can be DRASTICALLY Lower than the Income Benefit- leaving you locked in.
So, the income benefit is a guaranteed $200K but as far as the account value goes, your guess is as good as mine.
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, and you are not locked in along the way.
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.