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A guaranteed minimum withdrawal benefit (GMWB) is an optional rider that can be added to an annuity contract. It ensures a steady stream of retirement income by allowing you to withdraw a specific percentage of funds each year, regardless of market conditions. A GMWB rider is often paired with a variable or fixed-index annuity.

A GMWB rider protects your annuity’s highest value — also known as the “benefit base” or “high-water mark” — during a down market while still allowing underlying investments to grow during an up market.

In this way, a GMWB transfers market- and longevity-related risk from the annuity owner to the insurance company underwriting the guarantee.

Why People Buy GMWB Riders

Variable and fixed-index annuities have attractive growth potential. But they do carry risk. Because the value of underlying investments can fluctuate with the stock market, these annuity payouts may be directly impacted by factors beyond your control.

This isn’t a reassuring thought for consumers seeking a safe income stream for retirement.

A guaranteed minimum withdrawal benefit, like similar income riders, offers protection against this risk. If the market plummets, you can still withdraw a guaranteed percentage of your principal.

GMWBs and other income riders have become popular additions to variable annuity contracts. According to an analysis by the Massachusetts Institute of Technology, 95 percent of variable annuities now offer some sort of financial guarantees.

The maximum amount you can withdraw each year varies but is usually between 5 and 10 percent of the original lump-sum principal you paid the insurance company.

Most GMWBs allow you to start, stop, or change your withdrawal amount at any time. But it’s important to note that taking more than the annual guaranteed withdrawal may negatively affect your benefits.

How Does It Work?

To get a better understanding of how a GMWB works, consider this example of a variable annuity with a guaranteed minimum withdrawal benefit.

Let’s say you purchase a $100,000 variable annuity. You agree to a 10-year surrender period and a GMWB rider with a 5 percent annual withdrawal guarantee.

After 10 years, the markets are in chaos, and your underlying variable annuity investments are now worth only $75,000.

Because you purchased a GMWB rider, you can still withdraw 5 percent, or $5,000, a year until your original $100,000 investment is recovered.

No matter how much your annuity contract decreases in value as a result of poor market performance, your minimum annual withdrawal is guaranteed at $5,000. Even if the funds are completely depleted, the insurance company will continue to disburse these minimum payments for the rest of your life.

Did You Know?
Some GMWB riders allow you to withdraw amounts of greater value when the market is performing well.

The percentage you can withdraw usually correlates to your age at the time you wish to make the withdrawal. The older you are when you activate the rider, the more money you can take out and still have guaranteed income for life.

For example, your withdrawal benefit may increase to 5.5 percent between 65 and 69 years old, then 6 percent at 70 years old and older.

Step-Up Provision

If the subaccounts in your variable annuity’s underlying portfolio perform well some years, your GMWB rider may lock in this new contract value and, subsequently, your minimum withdrawal benefit would be based on the higher figure instead of your original principle.

Let’s think back to our earlier example.

You buy a variable annuity for $100,000 along with a GMWB rider.

During the third year of your contract, the value of your annuity increases to $125,000 — even after your 5 percent annual withdrawal.

Because market conditions resulted in an increase in the value of your annuity, your GMWB rider now allows you to lock in this new figure by “stepping up” your contract’s benefit base to match your new contract value of $125,000.

From now on, your withdrawal benefit is 5 percent of $125,000, or $6,500, instead of 5 percent of $100,000, or $5,000.

Now, let’s assume that during the sixth contract year, the value of your annuity contract jumps to $200,000.

Once again, you can lock in this new, higher value. Your annual withdrawal benefit is now 5 percent of $200,000 — or $10,000 a year.

In other words, your guaranteed withdrawal percentage remains the same — it’s based on your age at the time the rider is activated — but the actual dollar amount you can take out each year increases if the benefit base increases.

Even if the stock market crashes in year nine and your contract value drops to $75,000 and never returns to that $200,000 high-water mark, the GMWB riders allows you continue to withdraw 5 percent of $200,000 each year.

Fees and Additional Costs

GMWBs offer protection against risk as part of a holistic financial strategy, but you will pay for this protection.

If you’re in the market for a variable annuity and are considering adding a GMWB rider, it is essential to examine all associated fees and costs.

A typical GMWB rider fee can range from 0.5 to 1 percent each year. Other riders, such as a guaranteed minimum income benefit, or GMIB, may cost up to 1.5 percent a year. The fee will vary depending on the provisions of the rider. Usually the higher the yearly fee, the larger your guaranteed withdrawal percentage will be.

To enjoy the customizable benefits of variable annuities, you may encounter other costs.

Other Costs and Fees Associated With Variable Annuities
Annuity Account Fees
This fee is usually small and often waived once your contract value exceeds a certain level, such as $50,000.
Surrender Fees
Surrender fees apply only if you take out more than 10 percent of your contract value at one time. The fee decreases every year you own the annuity until it is eliminated, usually after seven to 10 years.
Mortality and Expense (M&E) Charge
Mortality and Expense charges cover the cost of death benefits or other income guarantees associated with your annuity contract. This charge usually ranges from 0.4 to 1.75 percent a year.
Underlying Investment Fees
Depending on your variable annuity contract and the funds you choose to invest in, these underlying investment fees can cost 0.25 to 3 percent a year.

Because annuities are a form of insurance, they may not net returns as high as individual stocks or other investment vehicles. But people buy insurance to safeguard against major threats and damage.

The important question for a retiree to consider is whether potential benefits offered through a GMWB rider are greater than or equal to the cost of the product.

Ask a financial advisor to go over the fine print in any proposed contract until you feel comfortable making a decision.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: January 13, 2021

7 Cited Research Articles

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  1. Blanchett, D. (n.d.). The Expected Value of a Guaranteed Minimum Withdrawal Benefit (GMWB) Annuity Rider. Retrieved from https://www.semanticscholar.org/paper/The-Expected-Value-of-a-Guaranteed-Minimum-Benefit-Eickelberg/6868f405511a12110b16a447b08d16300c6a2fc8?p2df
  2. Goodman, B. & Tanenbaum, S. (2008, April). The 5% Guaranteed Minimum Withdrawal Benefit: Paying Something For Nothing? Retrieved from https://www.tiaainstitute.org/sites/default/files/presentations/2017-02/5percent-gmwb-goodman-tanenbaum.pdf
  3. Liu, Y. (2008, August). Guaranteed Minimum Withdrawal Benefit in Variable Annuities. Retrieved from https://www.soa.org/globalassets/assets/files/static-pages/research/arch/2007/arch07v41n1_xix.pdf
  4. Ontario Securities Commission. (2018, February 21). Guaranteed minimum withdrawal benefit (GMWB) products. Retrieved from https://www.getsmarteraboutmoney.ca/invest/investment-products/complex-investments/guaranteed-minimum-withdrawal-benefit-gmwb-products/
  5. Rae, D. (2019, July 1). The Six Variable Annuity Fees You Need To Know About. Retrieved from https://www.forbes.com/sites/davidrae/2019/07/01/variable-annuity-fees/#118f4bba7de2
  6. Reish, F. (2020, January 14). SECURE Act and Guaranteed Income (Part 2). Retrieved from https://www.natlawreview.com/article/secure-act-and-guaranteed-income-part-2
  7. Shah, P. & Bertsimas, D. (2010, September 29). An Analysis of the Guaranteed Withdrawal Benefits for Life Option. Retrieved from http://www.mit.edu/~dbertsim/papers/Finance/An%20Analysis%20of%20the%20Guaranteed%20Withdrawal%20Benefits%20for%20Life%20Option.pdf