Guaranteed Lifetime Withdrawal Benefit (GLWB)

What Is a Guaranteed Lifetime Withdrawal Benefit Rider?

The guaranteed lifetime withdrawal benefit (GLWB) is one of the most popular living benefit riders. This income rider allows you to take lifetime withdrawals from an annuity, even if investment losses have significantly reduced the value of your account. 

To activate the rider, the underlying variable annuity contract must be annuitized, which means exchanging its cash value for an income stream. You control the timing of this decision, but the degree of flexibility can vary from one annuity to the next.

Essentially, the GLWB rider guarantees a minimum return on your investment while providing near-term liquidity. However, like anything in life, the benefits come at a cost. Take a closer look at how this income rider works before making a decision.

A GLWB rider is an optional feature associated with a variable annuity, which is a financial contract between an individual (annuitant) and an insurance company. The contract involves an upfront payment by the annuitant in exchange for a series of income distributions from the insurance company.

The contract is referred to as “variable” because the income distributions can vary depending on the performance of underlying the investments. You can lose money on a variable annuity, but most contracts offer riders that allow you to adjust your risk exposure.

One of the most popular living benefits, the Guaranteed Lifetime Withdrawal Benefit Rider can offer peace of mind by laying down a floor on the withdrawals you can receive from the policy. When added to a variable or semi-variable annuity policy, it can offer much-needed risk reduction for yourself and your heirs. 

Stephen Kates, CFP®Principal Financial Analyst for Annuity.org

Stephen Kates, CFP® is a personal finance expert specializing in financial planning and education. He serves as the Principal Financial Analyst for Annuity.org, where he delves into industry trends to support consumers and financial advisors on wealth management, annuities, retirement planning, and investing.

How Do GLWB Riders Work?

Let’s frame things with a realistic scenario.

Assume you are 58 years old and targeting retirement in seven years. You have some modest savings in a 401(k) plan; the money is invested in stock funds and a highly interest-rate-sensitive bond fund. You intend to maintain the current asset allocation but  want to complement these relatively volatile holdings with a low-risk annuity, using $200,000 of recently inherited cash.

You don’t think a fixed annuity offers enough upside potential, but you are leery of assuming the downside risk associated with a variable annuity. After careful consideration, you opt to strike a happy medium by purchasing a variable annuity with a guaranteed lifetime withdrawal benefit rider. The terms of the contract and an illustrative computation are as follows.

Hypothetical Terms and Conditions

The terms of the income rider specify that, at the point of annuitization, the annual withdrawal amount is a fixed percentage of the higher of the following:

1. Cash value — Your premium payments adjusted for actual market returns
2. Benefit base — An artificial value that reflects the GLWB rider’s minimum guarantee (annualized return of 6%, net-of fees, prior to annuitization)

If you benefit from strong market performance and the cash value of your annuity outpaces the benefit base, your withdrawals will be higher than the minimum guarantee. Conversely, if you suffer from poor market performance and the cash value of your annuity dips below the benefit base, your withdrawals will reflect the minimum guarantee.

With the GLWB rider, there are no surrender charges, but the contract specifies a 3% annual withdrawal if you annuitize in the first year. However, if you wait to annuitize, the annual withdrawal rate increases by 1% each anniversary year. This holds true for seven years, after which the maximum annual withdrawal rate of 10% is achieved.

Annual Withdrawal Percentage

Anniversary Year	Annual Withdrawal Percentage
1	4.0%
2	5.0%
3	6.0%
4	7.0%
5	8.0%
6	9.0%
7	10.0%

Hypothetical Computation

Fast forward seven years. You have opted to hold off annuitizing until now.

The market has been exceptionally turbulent and your cash value has only grown by 3%, net of fees, on an annualized basis. The cumulative balance is $246,000, which limits your annual withdrawal to $24,600 ($246,000 × 0.10 = $24,600).

However, per the terms of the income rider, the benefit base has grown by 6% annually, net of fees, resulting in a cumulative balance of about $301,000. This means your annual withdrawal is $30,100 ($301,000 × 0.10 = $30,100), nearly $5,500 more.

Additional Features

Some GLWB riders offer additional features. They typically add to the cost of the rider.

Common Enhancements

Special Withdrawals

Some GLWB riders allow you to make extra withdrawals from your annuity after annuitization has commenced. The enhanced liquidity can be invaluable, but unscheduled withdrawals will reduce future distributions.

Step-Up Feature

With this feature, the issuer will periodically compare the cash value of your account with the benefit base throughout the annuitization phase of your annuity. Moreover, the issuer will always use the higher of the two values to compute your income distributions. So, with a step-up feature, your distributions could increase after the point of annuitization.

Pros and Cons of GLWB Riders

A guaranteed lifetime withdrawal benefit rider has both advantages and disadvantages. The biggest advantage is the ability to ensure stable, lifetime distributions, regardless of how the market performs. Another advantage is the liquidity enhancement of being able to access the cash invested in your annuity at any time, without suffering surrender charges.

The primary disadvantage of a GLWB rider is its cost, which can reduce your payouts. Generally, the longer your investing horizon, the less likely this income rider is right for you. A relatively long runway gives you the ability to endure near-term market volatility without a safety net.

That said, if you have a relatively short horizon and may need access to your cash sooner than expected, a GLWB rider could provide a good way to optimize your risk-adjusted returns.

Who Should Get a GLWB Rider?

A GLWB rider can make sense if you want the upside potential of a variable annuity but need downside protection. The appeal is strengthened by the flexibility to take withdrawals. The important thing to remember is that GLWB benefits come at a cost, and it can reduce your payments.

If you’re interested in incorporating an annuity into your retirement plan but are unsure which type is right for you or whether adding an income rider makes sense, consult with a fiduciary financial advisor. They can help you holistically evaluate your situation, assess your options and, if appropriate, determine the most sensible way to buy an annuity.