What You Need to Know About Guaranteed Minimum Withdrawal Benefit Annuities

Guaranteed Minimum Withdrawal Benefits, or GMWB, are options in some segregated fund contracts that allow the policy holder to receive a guaranteed income for life.  These types of contracts can be appealing for retirees looking for a guaranteed income stream and who are nervous about market fluctuations.

What You Need to Know

Guaranteed Minimum Withdrawal Benefits is a product that was developed to act as both a traditional investment and an annuity.  They offer policy holders a guaranteed minimum income from their savings each year, while also allowing them to benefit from investment gains in their portfolio.  This is how they work:

1. Investor Deposits Lump Sum

Investors deposit a lump sum of money into the investment contract, usually pre-retirement.  At this point, the money is invested as usual and the investor will need to choose investments.  It is sometimes typical for these types of contracts to restrict the amount of equity exposure the investment can have.

2. Guaranteed Income Starts

Once the funds have been deposited into the contract, the policy holder is entitled to a certain level of income starting at a specific age. This is usually age 65 but may vary.   The guaranteed income offered in these contracts is typically 4-5% of your savings.   The income lasts indefinitely.  This addresses many people’s concern about outliving their money.

3. Increases in the GMWB

There are two ways to increase your guaranteed benefit.   The first way is by a 5% annual bonus. This bonus is applied for every year you don’t take the benefit.  The bonus is typically only available for the first 15 years of the contract.   These features do vary by company.

The second way to increase the benefit is by locking in investment gains.   Typically, every 3 years (though this may vary by contract) you will have an option to “lock in” the market value of your contract.  This allows you to take advantage of any investment gain.  The result is having a higher amount to base your GMWB on.  Once it is locked in, the benefit will always be based on this amount, even if the market value of the portfolio were to decline.

4. The Payments Begin

Typically, around 65, the investor will start making their withdrawals.  These payments will be made up of the GWMB agreed upon when the contract was established, as well as any bonuses.  This will also account for any locking in.   These withdrawals may decrease the market value of  your investment, but not the amount used to determine the guaranteed income.

5. Beneficiaries

The payments end at the time of your death.  At this time, your named beneficiaries will receive the remaining market value of your contract.

The Bottom Line

Guaranteed Minimum Withdrawal Benefits can be a good solution for some retirees looking to secure a guaranteed retirement income.  However, as these contracts may have higher investment fees than a regular investment contract, and there can also be stiff penalties for any withdrawals taken above and beyond the GWMB amount, it is a good idea to review with your advisor on your specific retirement income needs to see if this solution may work for your retirement income planning.