Guaranteed Minimum Withdrawal Benefit (GMWB)

What Is a GMWB Rider?

If the market declines, having a guaranteed minimum withdrawal benefit (GMWB) rider provides a safety net. With a GMWB rider, you can withdraw a guaranteed percentage of your principal, regardless of how much the value of your investment has decreased.

The maximum amount you can withdraw each year with a GMWB varies, but is usually between 5% and 10% of the original lump-sum principal you paid to the insurance company.

Most GMWBs allow you the flexibility to start, stop or change your withdrawal amount at any time. 

GMWBs and other living benefit riders have become popular additions to variable annuity contracts, with most variable annuities now offering some form of financial guarantee. However, these features are not always automatically included. Moreover, according to the National Association of Insurance Commissioners, riders for variable annuities come with additional costs.

GMWB riders offer protection against market decline. This can be reassuring, but costly too. Whether the tradeoff is worth it depends on your specific needs.

Brandon Renfro, Ph.D., CFP®, RICP®, EACo-Owner of Belonging Wealth Management

As a Certified Financial Planner™ professional and Retired Income Certified Professional®, Brandon Renfro is well-versed in the financial information and strategies needed to meet retirement goals. In addition to co-owning Belonging Wealth Management and assisting clients, Brandon writes regularly for financial publications.

How Do GMWB Riders Work?

GMWB riders give you the ability to make withdrawals based on your principal investment — even if that investment has lost value.

To understand the workings, consider an example. Assume you purchase a $100,000 variable annuity, agreeing to a 10-year surrender period and adding on a GMWB rider with a 5% annual withdrawal guarantee.

During that 10-year period, the markets severely underperform and the annuity’s underlying investments are now worth just $75,000. Without a GMWB rider, you would have lost that portion of your principal.

But, because you purchased the rider, you can still withdraw 5% (or $5,000) per year until your original $100,000 investment is recovered.

Essentially, even though your investment did not grow in value as you had hoped, you are insulated from the loss of principal and have  the ability to withdraw at least 5% per year from the annuity.

The percentage you can withdraw from your annuity is usually positively related to your age at the time you wish to make the withdrawal. The older you are when you activate the rider, the more money you can take out and still have guaranteed income for life.

For example, say you are currently 65 and waiting to withdraw on your variable annuity with a GMWB rider. If you hold out, your withdrawal benefit may increase to 5.5% at 69 years old or to 6% when you reach 70 years old.

Step-Up Provisions

Some GMWB riders come with a unique feature known as a step-up provision, which gives you the ability to claim more than your principal in payments.

With a step-up provision, if your variable annuity performs well and increases in value, your GMWB rider can lock in on this new, higher contract value. Your minimum withdrawal benefit would then be based on that higher figure instead of the original principal.

Suppose you begin taking a 5% minimum withdrawal benefit on an underperforming variable annuity. After a few years, the portfolio recovers and exceeds its original value. You can now “step up” and begin receiving payments worth 5% of this higher contract value instead of payments equal to 5% of your principal investment.

Your guaranteed withdrawal percentage remains the same, but the actual dollar amount you can take out each year increases if the benefit base increases.

Additionally, even if the portfolio’s value declines in subsequent years, you will still continue to receive payments based on the stepped-up amount.

How Much Do GMWB Riders Cost?

A typical GMWB rider fee can range from 0.5% to 1% each year. The fee will vary depending on the provisions of the rider. Usually, a higher yearly fee equates to a larger guaranteed withdrawal percentage. So, while GMWBs are remarkably effective in protecting against some of the inherent risks of variable annuities, they can be costly. 

Consider that annuity rider fees stack. Other similar living benefit riders, such as a guaranteed minimum income benefit (GMIB), may cost up to 1.5% a year. The more riders you add to your contract, the higher your fees will grow.

GMWB riders offer an effective layer of security, but you will have to weigh how valuable that security is to you versus the price you pay to receive it. 

Because annuities are insurance products, they may not produce returns as high as those generated by individual stocks and other investment vehicles. Acknowledging this opportunity cost is important and should be carefully considered when planning for retirement. To thoroughly assess your options, you should consult with a financial advisor. 

Read More: How To Choose a Living Benefit Rider

Frequently Asked Questions About GMWBs