Guaranteed Minimum Withdrawal Riders
Overview
Choosing when to retire can be a difficult decision. However, choosing where to put your money before retiring and how much to spend during retirement can be even more difficult.
As a result, many people have turned to fixed indexed annuities as one of their retirement vehicles.
Fixed Indexed Annuities can be a strong foundation for your retirement dollars since you have a minimum guaranteed surrender value can have annual penalty free withdrawals of 10% of your contract value after the first contract anniversary, a penalty free death benefit to your beneficiary at all times cannot get back less than your premium at the end of the term.
However, a secure foundation is only part of it, you want your retirement dollars to grow too.
And, indexed annuities can grow 3 different ways since:
- the minimum guaranteed surrender value can increase each year
- interest can be linked to an equity or bond index so you can get a percentage of any possible index increases
- 100% of the interest is tax-deferred until withdrawn.
As a result, Indexed Annuity sales have grown more than 800% since their inception in 1997. But, in the opinion of some, Indexed Annuities sales might increase faster for some insurers since as some insurers now offer a Guaranteed Minimum Withdrawal Benefit Rider, a rider that addresses the number one concern so many have outliving their money.
Would you like to see how a Guaranteed Minimum Withdrawal Benefit Rider can work?
With many riders, a contract holder can receive annual withdrawals for life regardless to index gains and, an annual growth is guaranteed like 4%-5% right up to the time annual withdrawals begin.
Fortunately, the rider is quite simple to explain. Unfortunately, we can make it real confusing too.
Fixed Indexed Annuities have a Minimum Guaranteed Surrender Value. This is the least amount that a contract owner receives if they surrender.
Fixed Indexed annuities also have a Cash Surrender Value.
This is what a contract owner receives if they surrender the indexed annuity during the surrender charge period, a value higher or lower than the Minimum Guaranteed Surrender Value depending upon index gains.
Fixed Indexed Annuities also have a Contract Value based on premium, bonuses, if any, and possible index increases. This what the contract owner receives if they surrender the fixed indexed annuity after the surrender charge period and what the beneficiary can receive if the annuity contract pays the contract value, not the cash surrender value, as the death benefit to the beneficiary.
However, the account that is getting the most of the attention is the account that determines the amount of annual withdrawals for life regardless to index gains.
Some annuity contract call this account the Income Account Value. Said differently, how can a contract owner age 65 make a premium of $100,000 and withdraw a total of $157,500, $5,250 a year for 30 years, even if the contract had zero index gains each year?
Exibit A:
It all starts with The Income Account Value, an account that has NO bearing to how much a contract owner receives when they surrender or when they exchange their annuity for another annuity. But, The Income Account Value determines the amount of annual withdrawals for life. If you want to surrender, you look at the Guaranteed Minimum Surrender Value or the Cash Surrender Value.
But, if you want annual lifetime withdrawals, you look to the Income Account Value. Let’s assume a premium of $100,000 and that the Income Account Value equals all paid premiums plus 5% accumulated interest annually. This is how the Income Account Value could grow right up to the time annual withdrawals begin.
Exibit B:
Let’s further assume that you want to begin taking annual withdrawals. How much will you be able to withdraw? Assuming a 5% withdrawal rate, you could withdraw $5,500 each year for life, 5 times The Income Account Value of $110,000.
But, let’s assume that the annuity has an automatic annual step up provision, the Income Account Value can step up to equal your contract value. And, if that were to occur, your annual withdrawals could increase.
And, one of the benefits of the Lifetime Income Benefit Rider is that you are taking withdrawals, not annuitizing, so you will still have access to your Minimum Guarantee Surrender Value or Contract Value if you decided to stop taking annual withdrawals.
In summary, you can establish a strong foundation for your retirement with guarantees, possible index gains, tax-deferral, possible probate advantages, income for life via annuitization or annual withdrawals and, as a result of this rider, annual withdrawals for life.
But, it all begins with a decision from you to introduce this rider in a balanced and fair way. Therefore, let’s look at the some of the disadvantages of this rider.
Disadvantages to Living Rider
- An Annual Cost of, for example, 0.35 basis points could mean thousands of dollars assuming a $100,000 premium; even a zero % cost could, arguably, still cost the same thousands of dollars since the 0% cost is reflected in the pricing of the product (lower participation rate, lower cap, higher spread, etc.)
- Annual lifetime withdrawals often must begin before a specific contract anniversary, such as before the 10th, 12th, or 15th contract anniversary
- Annual lifetime withdrawals often must begin before a certain age, such as age 85
Is the Guaranteed Minimum Withdrawal Benefit for all of the people all of the time? No, just like Fixed Indexed Annuities, it can be the right for some of the people some of the time. But, determining which people need the Guaranteed Minimum Withdrawal Benefit begins with an informed financial professional asking questions, ascertaining the consumer’s tolerance for risk and time horizon, making sure that the consumer’s retirement dollars are well diversified and that money exists elsewhere for the unexpected emergency (health care) or expected event (2nd home).
