Guaranteed Lifetime Withdrawal Benefit (GLWB)

A guaranteed lifetime withdrawal benefit (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 investments. You can lose money on a variable annuity, but most contracts offer riders that allow you to adjust your exposure to risk.

The 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.

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 you 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.

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 values:

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 an annual withdrawal of 3% if you annuitize during 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 until the maximum annual withdrawal rate of 10% is achieved.

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 = $30,000), nearly $5,500 more.

Some GLWB riders offer features that extend further. They typically add to the cost of the rider.

A guaranteed lifetime withdrawal benefit rider has both advantages and disadvantages. The most prominent advantage is the ability to ensure stable, lifetime distributions, regardless of how the market performs. A secondary 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 be a drag on 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.

Generally, withdrawing money from an annuity before age 59 1/2 can trigger a 10% early withdrawal penalty, along with any taxes due on the distribution. If an annuity is purchased with pre-tax dollars, the full amount of all income distributions — inclusive of the principal and the earnings components — is taxable. If an annuity is purchased with after-tax dollars, only the earnings distributions are taxable. That said, within a Roth-style retirement vehicle, all distributions are tax exempt.

A GLWB rider can make sense when you want the upside potential of a variable annuity but require downside protection. The appeal is strengthened by the flexibility granted for taking 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 and whether adding an income rider is sensible, 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.

Editor Samantha Connell contributed to this article.