Optimal Portfolio Allocations with GMWB Annuities

Blanchett, David M.
October 2012
Journal of Financial Planning;Oct2012, Vol. 25 Issue 10, p46
Academic Journal
• The majority of past research on variable annuities with guaranteed minimum withdrawal benefit riders (GMWB annuities) has noted a "cost" associated with investing in a GMWB annuity versus a non- annuity portfolio with the same equity allocation in which the cash flows are equalized, to varying degrees. This is somewhat of an unfair comparison, though, given the unique nature of a GMWB annuity and its potential benefits. • A GMWB annuity compares much more favorably against an immediate fixed annuity, which is a more relevant proxy for generating guaranteed income for life. When viewed from a total portfolio framework in which the goal is to maximize a utility function based on income replacement, the appeal of a GMWB annuity increases considerably, especially for retirees with lower levels of pension income, more conservative withdrawal rates, and more conservative equity allocations during retirement. Therefore, while GMWB annuities may appear to be relatively "inefficient" at an individual product level, a GMWB annuity can improve the overall efficiency of a retirement portfolio and better help a retiree generate sustainable income for life for the right situations.


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