Pros/Cons for GMWB (Guaranteed Minimum Withdrawal Benefit)

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FinanceRookie
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Pros/Cons for GMWB (Guaranteed Minimum Withdrawal Benefit)

Post by FinanceRookie »

Greetings All,

I have a somewhat low level understanding of the pros and cons surrounding the GMWB. From my understanding the main "marketable" advantages are as follows:

-Minimizing longevity risk
-If portfolio value drops to zero, annuitant is still guaranteed lifetime income
-Allows for any remaining portfolio value to transfer to a designated beneficiary upon death of the annuitant
-Some allow for guaranteed crediting rates to the benefit base
-Lifetime distribution factors increase as you age
-Step up in benefit base when portfolio value exceeds previous policy anniversary amount.
-Peace of mind.

Debatable Advantages Include:
-Lower negative income returns
-Lower standard deviation
-Higher income returns
-Higher withdrawals

Disadvantages include:
-High fees for the GMWB rider itself, in addition to the administration and M&E fees, and investment management fees.
-Many providers cap equity exposure
-GMWB is not directly tied to inflation; only to accounts benefit base.

Are there any other pros or cons that should be considered?
staythecourse
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Re: Pros and Cons for GMWB

Post by staythecourse »

I must be even more of a financial rookie... What does GMWB stand for??

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle
Topic Author
FinanceRookie
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Re: Pros and Cons for GMWB

Post by FinanceRookie »

staythecourse wrote:I must be even more of a financial rookie... What does GMWB stand for??

Good luck.
GMWB stands for Guaranteed Minimum Withdrawal Benefit. It is an annuity rider which has become increasingly popular with retirees who are looking to "reduce longevity risk". At its core, this rider serves as insurance should the retiree's alternative investments can no longer fund the expected withdrawal amount, or if the annuitant dies before or after “annuitization”.
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Frugal Al
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Re: Pros/Cons for GMWB (Guaranteed Minimum Withdrawal Benefi

Post by Frugal Al »

You'll know more than most sales agents by reading this article by Wade Phau. And this is a one of the better scenarios with regards to expenses. I wouldn't touch one.
http://advisorperspectives.com/newslett ... lusion.php
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Oicuryy
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Re: Pros/Cons for GMWB (Guaranteed Minimum Withdrawal Benefi

Post by Oicuryy »

I think you have the wrong acronym. Your description seems to match a Guaranteed Lifetime Withdrawal Benefit (GLWB).

A Guaranteed Minimum Withdrawal Benefit (GMWB) typically guarantees that you can withdraw a predetermined dollar amount such as the premiums you paid. It does not guarantee lifetime withdrawals.

Ron
Money is fungible | Abbreviations and Acronyms
Topic Author
FinanceRookie
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Re: Pros/Cons for GMWB (Guaranteed Minimum Withdrawal Benefi

Post by FinanceRookie »

Oicuryy wrote:I think you have the wrong acronym. Your description seems to match a Guaranteed Lifetime Withdrawal Benefit (GLWB).

A Guaranteed Minimum Withdrawal Benefit (GMWB) typically guarantees that you can withdraw a predetermined dollar amount such as the premiums you paid. It does not guarantee lifetime withdrawals.

Ron
I was under the assumption that they were one in the same. Anyway, these are far to confusing.
BruDude
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Re: Pros/Cons for GMWB (Guaranteed Minimum Withdrawal Benefi

Post by BruDude »

GMWB's apply to variable annuities, GLWB's apply to fixed annuities.
gerrym51
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Re: Pros/Cons for GMWB (Guaranteed Minimum Withdrawal Benefi

Post by gerrym51 »

annuities no-confusion yes
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Oicuryy
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Re: Pros/Cons for GMWB (Guaranteed Minimum Withdrawal Benefi

Post by Oicuryy »

FinanceRookie wrote:I was under the assumption that they were one in the same. Anyway, these are far to confusing.
A first step in overcoming the confusion is to learn the different types of living benefit riders that are available with variable annuities. This page has short descriptions of four of them.
http://www.annuitydigest.com/faq/what-a ... -they-work

Ron
Money is fungible | Abbreviations and Acronyms
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Frugal Al
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Re: Pros/Cons for GMWB (Guaranteed Minimum Withdrawal Benefi

Post by Frugal Al »

I got the acronym wrong as well, only adding to the confusion. My apologies. Still wouldn't touch one.
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FinanceRookie
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Re: Pros/Cons for GMWB (Guaranteed Minimum Withdrawal Benefi

Post by FinanceRookie »

:beer
MN Finance
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Re: Pros/Cons for GMWB (Guaranteed Minimum Withdrawal Benefi

Post by MN Finance »

I don't see that there are any pros, none. VAs with such features have such high costs that portfolio growth is so hampered that you're all but forced to take out one of the withdrawal options. Given that outcome, you (someone) is better off investing in an entirely different vehicle from the start. If the question is to get into one in the first place or not, that's pretty obvious. If someone already has one and the market has just fallen, then there's some calculation needed. It's not like the insurance co rubs their hands together and creates money youre otherwise not entitled to. Monte Carol analysis shows that these annuities turn out better than a conventional portfolio something like 6% of the time.
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Oicuryy
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Re: Pros/Cons for GMWB (Guaranteed Minimum Withdrawal Benefi

Post by Oicuryy »

FinanceRookie, I wrote the following response to a post of yours that isn't there anymore. I'm posting it anyway.

Now I see why my post confused you. Here is a link to that Blanchett piece.
http://www.fpanet.org/journal/CurrentIs ... uityRider/
In it he says, "GMWB riders are also sometimes known as guaranteed lifetime withdrawal benefits (GLWBs)." The link I posted earlier says, "A guaranteed lifetime withdrawal benefit (GLWB) is also referred to as a guaranteed minimum withdrawal benefit for life."

Blanchett caused the confusion when he left out the "for life". The rider he describes is a GLWB. A GMWB without the "for life" is a different product. If you are shopping for the product he describes ask for a GLWB. If you ask for a GMWB you might not get what you want.

No wonder people think annuities are confusing.

Ron
Money is fungible | Abbreviations and Acronyms
jimmy
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Re: Pros/Cons for GMWB (Guaranteed Minimum Withdrawal Benefi

Post by jimmy »

All in with probably 2.5% fee's that you will be paying for the rest of your life is insane. If you read the fine print of the 100 plus page prospectus you will probably see the fee for this rider (GMWB) could substantially increase if the insurance co. needs to raise it. Also fee's can be deducted from the benefit base vs. the contract value (whichever is higher). Read the prospectus if you understand it and it makes sense go for it and good luck. But if you are like 99% of the population and all it does is confuse you, move on... I would rather buy a few index funds and take a 4-6 distribution rate (when needed) without all the bells and whistles.
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