The Expected Value of a Guaranteed Minimum Withdrawal Benefit (GMWB) Annuity Rider

Blanchett, David M.
July 2011
Journal of Financial Planning;Jul2011, Vol. 24 Issue 7, p52
Academic Journal
• The analysis conducted for this paper suggests that the probability of a retiree actually needing income from a guaranteed min mum withdrawal benefit (GMWB) annuity, versus the income that could be generated from a taxable portfolio with the same value, is approximately 3.4 percent for males, 5.4 percent for females, and 7.1 percent for a couple, given current prevailing lifetime distribution factors (or guaranteed withdrawal rates). • However, the net "cost" of the GMWB annuity from the perspective of the annuitant as a percentage of annuity total value is approximately 6.5 percent, 6.1 percent, and 7.4 percent of the initial portfolio value for males, females, and couples, respectively (again, given current lifetime distribution factors for GMWB annuities). • Because an annuity is a form of insurance, it would not be expected to have a positive average expected value, and will therefore compare unfavorably to non-annuity portfolios in "average" scenarios. The real question for a retiree is whether perceived benefits are greater than or equal to the cost of the insurance. • Based on the results of this study the guaranteed income protection in a GMWB annuity may be a relatively inexpensive form of "longevity insurance," especially from a behavioral finance perspective, as retirees greatly fear outliving their retirement income, Although the current guaranteed rate environment is not generally favorable from an absolute average net value perspective, the author cortends that GMWB-type features hold significant promise and are a viable strategy for managing longevity risk for a retiree.


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