Retirees want products that insure they will not outlive income, have some inflation protection, and at the same time maintain flexibility and control. Annuities can offer such benefits, but individuals are often reluctant to annuitize assets. Two of the risks inherent in variable annuities – the inability to leave an estate and the potential for low income – led to the creation of a new product, the 5% Guaranteed Minimum Withdrawal Benefit (GMWB.) The GMWB product seems to offer everything that retirees are looking for.
However, this product only has value if the performance of the underlying funds is extremely poor. If market performance is similar to the past few decades, the buyer is paying for an insurance feature that has little value. We believe that the fees will result in a diminished estate, and a retiree would most likely not outlive the income stream it produces even without purchasing the protection. Furthermore, we believe that a life annuity would provide better inflation protection and can potentially leave a larger estate. In addition, an annuity can offer even greater flexibility since the accumulation of the excess income over that provided through a GMWB is fully liquid, unlike the GMWB product where the account balance is needed to produce future income. If the GMWB investment performed poorly, there may not be any account balance to withdraw. Last, you can annuitize a portion of your assets to match the income you need, and leave the rest for other needs or to your estate.
