Fixed-index annuities (also referred to as equity-indexed annuities) and variable annuities can be useful options for retirement savings because interest earnings are tax-deferred until withdrawn.  These annuities can also be converted to a stream of income payments that can last for the rest of your life (annuitization). However, annuitization generally requires that you exchange your annuity account balance for income payments. Due to growing demand for additional income options, many issuers are offering a rider, called a guaranteed lifetime withdrawal benefit (GLWB), to variable annuities and fixed-index annuities that allows you to get lifetime income payments while continuing to have access to the annuity’s remaining cash value.

Here’s how it works
There are different variations of the GLWB rider, depending on the issuer offering it, and typically, a GLWB option subjects the annuity owner to specific age restrictions or income limitations, depending on the specific optional benefit offered with a particular annuity.  However, most issuers incorporate some common features. Your annuity premium is invested in subaccounts (with a variable annuity) or earns interest (with a fixed-index annuity). Thereafter, you can elect to receive annual withdrawals from the annuity that last for the rest of your life (minimum guaranteed withdrawal). The amount of the withdrawal is determined by applying a percentage (withdrawal percentage) to the premium or the cash value, whichever is greater at the time of your election. Withdrawals are subtracted from the cash value. The amount of the withdrawal will not decrease, even if the cash value decreases or is exhausted.  In addition, you continue to control the investment of the remaining cash value within the annuity, and have access to it.
For example, you invest $100,000 in a variable annuity with a withdrawal percentage of 5%. In five years, you elect to begin receiving minimum guaranteed withdrawals, but the cash value is worth only $80,000 (due to poor subaccount performance).  The withdrawal percentage (5%) is applied to your premium ($100,000) since it is greater than the cash value at the time of your election. Your minimum guaranteed withdrawal is $5,000 per year ($100,000 x 5%).*
Some issuers apply a minimum rate of return to your premium (minimum income value) apart from your cash value. In this case, the withdrawal percentage is applied to the greater of your minimum income value or your cash value to determine your guaranteed minimum withdrawal.  This option ensures that the amount of your minimum guaranteed withdrawal increases each year you defer receiving withdrawals.
To illustrate, use the same facts as the previous example, but include a minimum income value of 6% per year applied to your premium ($100,000). When you elect to receive withdrawals, the minimum income value is $133,823 ($100,000 x 6% per year x 5 years). Since this value is greater than your cash value ($80,000), the withdrawal percentage (5%) is applied to the minimum income value yielding a minimum guaranteed withdrawal of $6,691 per year ($133,823 x 5%).*
*Examples are for illustration purposes only and do not reflect the actual performance of a specific product or investment.
Issuers may also increase your guaranteed minimum withdrawal by increasing the withdrawal percentage as the age at which you elect to begin receiving withdrawals increases. For example, the withdrawal percentage could be 5% if you start withdrawals at age 55, 7% at age 70, and 8% at age 80.
However, if you exceed the allowable withdrawal amount, you may adversely affect your ability to continue receiving guaranteed income payments.
Consequently, you should carefully evaluate your specific financial needs and objectives in addition to the specific restrictions and limitations of a GLWB option.

The step-up feature
It’s possible the GLWB payments can increase over time if the issuer includes a step-up feature with the rider. At certain intervals (e.g., once a year), the issuer compares the annuity’s current cash value to the value used to determine your minimum guaranteed withdrawal. If the current value is greater, the issuer applies the withdrawal percentage to the current, higher value, thus increasing your minimum guaranteed withdrawals.
Say your minimum guaranteed withdrawals are $7,500 per year, based on a withdrawal percentage of 5% applied to the annuity’s cash value of $150,000.  Five years later, the annuity’s cash value increases to $160,000.  The new minimum guaranteed withdrawal is $8,000 per year due to the increased cash value ($160,000 x 5% per year).  The new minimum guaranteed withdrawal will not decrease, even if the annuity’s cash value later decreases, or is exhausted.

Access to the cash value
Most issuers allow you to take money from your cash value, even if you are also receiving GLWB withdrawals. However, some issuers reduce subsequent GLWB withdrawals in proportion to the amount you take from the cash value. For example, you have a cash value of $100,000 and your guaranteed withdrawals are $5,000 per year. One year you withdraw an additional 10% ($10,000) from the cash value. Correspondingly, your later GLWB payments will be reduced by 10% to $4,500.

Death benefit
Unless altered by a death benefit provision or rider, annuities with the GLWB rider usually pay a death benefit equal to the greater of the remaining cash value, or the remaining premium, if any, less withdrawals and applicable surrender charges.  Generally, GLWB withdrawals are available only to the annuity owner and not his/her beneficiaries, unless the beneficiary is the owner’s surviving spouse, in which case the withdrawals may be continued for the benefit of the spouse.

GLWB costs
Some issuers generally charge an annual fee for the GLWB rider, usually ranging from .1% to 1.0% or more of the annuity’s cash value.  Also, the step-up feature associated with a GLWB may subject the annuity owner to an increased cost in addition to the regular fee charged for GLWB option. Thus, you should consider this fact when evaluating such a feature. Review annuity sales materials, the prospectus, and the contract for information on charges and fees.

Some other living benefit riders
The GLWB is one of many living benefit riders available on some annuities that provides a minimum accumulation value or income. As with most annuity riders, they may differ depending on the issuer offering them. Also, since these benefits are offered as riders, there is usually a charge associated with each one.

Guaranteed minimum payments benefit
The guaranteed minimum payments benefit allows you to recover your total premium through annual payments from your annuity, even if the cash value is less than the premium due to poor market performance (and not withdrawals).

Guaranteed minimum income benefit
The guaranteed minimum income benefit pays a minimum yearly income even if your annuity decreases in value due to poor subaccount performance. But you must own the annuity for a minimum number of years before exercising the rider, and you must exchange the cash value of the annuity in return for the minimum payments (annuitization).

Guaranteed accumulation bene
fit
This rider guarantees the return of your premium (less withdrawals) regardless of the actual investment performance of your annuity subaccounts at the end of a stated period of time.

Is it right for you?
The GLWB rider can be a good idea if you want a fixed income but don’t like the idea of giving up access to your money that annuitization requires.  However, like all deferred annuities, they are intended as long-term investments, suitable for retirement funding. The annuity’s cash value may be subject to market fluctuations and investment risk. In addition, GLWB withdrawals are subtracted from the annuity’s cash value.
This information, developed by an independent third party, has been obtained from sources considered to be reliable, but Raymond James Financial Services, Inc. does not guarantee that the foregoing material is accurate or complete. This information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Investments mentioned may not be suitable for all investors. The material is general in nature. Past performance may not be indicative of future results. Raymond James Financial Services, Inc. does not provide advice on tax, legal or mortgage issues. These matters should be discussed with the appropriate professional.
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Stephen P. Poitevint is a Registered Principal and Financial Advisor of Raymond James Financial Services, Inc., member FINRA/SIPC, and is located at 908 Tallahassee Highway, Bainbridge, Georgia, and can be contacted at (229) 246-7208 or www.poitevint.com.