What Is a Guaranteed Minimum Withdrawal Benefit (GMWB)?
Let me explain what a guaranteed minimum withdrawal benefit, or GMWB, really is. It's a rider or add-on to certain annuity insurance policies that guarantees you, the policyholder, a steady series of annual withdrawals that add up to the return of all the premiums you've paid in, no matter how the investments perform.
You should know that a GMWB differs from a guaranteed minimum income benefit (GMIB), which instead provides a specified minimum periodic income after a waiting period, irrespective of the variable annuity's investment results.
Key Takeaways
Here's what you need to grasp about a GMWB: it guarantees your ability to withdraw a set percentage of your investment each year, regardless of market ups and downs. Those maximum withdrawals are usually between 5% and 10%. These riders are specifically designed to shield you during market downturns.
Understanding Guaranteed Minimum Withdrawal Benefit (GMWB)
You can find GMWB riders on some fixed annuity and variable annuity products. When the market takes a dive, you as the annuitant can withdraw a maximum percentage of your entire investment in the annuity. The annual maximums vary by contract but generally fall between 5% and 10% of the initial investment amount. You'll keep receiving income during the withdrawal period until you've depleted the total initial investment.
A GMWB protects you against investment losses while still letting you benefit from any upside gains. Take this example: suppose your initial investment was $100,000, but due to economic downturns, it's now worth only $85,000. If you've got a GMWB with a 10% rate, you can activate it to withdraw $10,000 each year until you've recovered the full $100,000.
In some cases, these riders allow for higher withdrawals when the market is strong and your annuity fund is growing. That means you might pull out more than the maximum based on your initial investment. Going back to the example, if your investment is now worth $150,000 and your rider has a clause for 2% of profits, you could withdraw more than $10,000 annually, provided the rider adjusts for favorable market trends.
How Is a GMWB Calculated?
The amount you can withdraw might also depend on your age when you start making withdrawals. For instance, the rider might let you take 4% if you begin between ages 60 and 64, bumping up to 4.5% between 65 and 69, and 5% after 70. Keep in mind that withdrawals before age 59½ could face a 10% early withdrawal penalty from the IRS.
Terms for GMWB riders, including fees, vary by the insurance company providing them. You might also encounter other riders like guaranteed lifetime withdrawal benefits or guaranteed minimum accumulation benefits.
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