Variable annuities with guaranteed lifetime payouts or GLWB

You may have heard of variable annuity – but what does GLWB mean?

It stands for a guaranteed lifetime payout performance. You may also find the popular GLWB contract tab with some stock-indexed annuities. Before I did any thorough analysis, I constantly had clients telling me it sounded too good to be true. Well, like many things that sound too good to be true, it probably is.

From a limited perspective as a broker, it sounded great. A pensioner’s income advantage is generally guaranteed to grow at 7% annually. At the beginning of the withdrawal, the contract holder will receive a guaranteed income of 5% of the income benefit value for life, regardless of the actual account development. With this product, I was essentially off the hook in terms of account management. No matter what, my client would get 7%. Boy oh boy life is easy now!

Not so fast. Did you read the last paragraph carefully? If it sounds too good to be true, you’d better take a second look. I’ll save you the trouble and just explain what’s going on here. There is a big difference between income benefit and account value. Let’s define these:

income benefit– This equals the initial investment plus the guaranteed interest rate, compounded annually until withdrawals begin. $100,000 invested today will grow to $200,000 in 10 years assuming 7% interest.

Income benefit is NOT how much money you have…

Bank balance– This is the actual value of the account as it performs on the open market, minus annual fees, which can exceed 3%.

The account value can be DRAMATICALLY lower than the income benefit – you remain blocked.

So the income benefit is a guaranteed $200,000, but as far as account value goes, your guess is as good as mine. It can be more or less. With a 3% annual fee, the account must win at least 10% to keep up with the guaranteed income benefit. Has the market ever done this? Have you ever seen the market return exactly 10% annually for ten years in a row? It has not. The market has developed better and worse. Sounds a bit like dice. Thank God for this GLWB.

How good is this guarantee really? Our $100,000 guarantees a lifetime income of $10,000 per year ten years from now (5% of $200,000). Honestly, that’s a paltry payout compared to other income products.

With an immediate annuity, it would only take about $134,000 to reach the GLWB payment for a 60-year-old man. For a joint life payout, you’d need a little over $153,000. You would need to earn around 3% and 4.5% respectively to enter the competition. This sounds a lot easier to me, and you’re not trapped along the way.

At age 60, the instant annuity pays around 7.5% for a single life and 6.5% for a shared life. That means it takes a lot less money to guarantee a higher income in the future.

Another advantage of the immediate pension is that the income rate increases with each year of life. If you wait until age 61 to start making payments, the income level will be slightly higher. The GLWB generally increases the payout to 6% at age 70. At this point, the immediate annuity would pay out about 9.3% for a single life and 7.5% for the life together option.

The GLWB never catches up. Why is this type of product sold so heavily? I suspect that many consultants are in the same position as me. Usually, when a client buys into the Income Guarantee, they feel a sense of relief and the advisor looks like a hero. A better advisor would conduct an in-depth analysis to find other options with higher income potential. After all, you want a guaranteed income, right?

Also, using the GLWB annuity is widely viewed as a way to stay in the market with a large safety net. I’ve already shown you that it only takes a 3-4.5% investment return to get an equal payment. With the high fees, any market profits are seriously diluted.

My advice: if you want to stay in the market, stay in the market but without a pension. I know this probably doesn’t get me any more business now, but it’s more of ethical advice. The potential for good investment returns is much higher without the variable annuity fee structure. By the way, this income guarantee is not free of charge.

If you want to guarantee future income now, find someone willing to work to give you a few more options. Do your research and find an advisor who is worth the money. But read the entire GLWB report first. It’s actually free.