Guaranteed Lifetime Withdrawal Benefit (GLWB) is not a stand-alone product but is a rider attached to a variable annuity insurance product.

How does it work?

The GLWB allows the annuitant to withdraw a fixed percentage of the total annuity premiums each year regardless of market performance. The income payments are guaranteed for life.

Example.

Bob, the annuitant, buys a variable annuity for $200,000 with a GLWB rider that pays 3% annually. The stock market had declined sharply during the past 10 years and the annuity is now worth $150,000. Bob will receive $6,000 per year for the remainder of his life ($200k x 3%). The guarantee is computed on the initial investment ($200,000) and not on the declined portfolio value ($150,000).

This product sounds like a winner. The annuitant receives downside protection through lifetime income and upside potential based on market performance. Not so fast. While the guarantees is favorable in a bear market by shifting the risk from the annuitant to the underwriter, this product comes with a cost.

The problems.

• The income received will not protect the annuitant against inflation.
• The fee structures is frequently complicated and expensive.

When does this product make sense?

• It permits the retirees to have a peace of mind without worrying about stock market conditions.
• It is helpful if the retirees have limited access to other guaranteed income sources (e.g. corporate defined-benefit plan).

When to avoid this product?

• If the retirees have other guaranteed income sources (e.g. corporate defined-benefit plan).
• If one expects inflation is to rise in the near future.