The Role and Inner Workings of Variable Annuities with Guaranteed Lifetime Withdrawal Benefits in Retirement

Abstract

A deferred variable annuity with a guaranteed lifetime withdrawal benefit is a retirement tool that can support protected lifetime income without having to annuitize assets until the contract value of the annuity depletes. This tool is controversial, with critics labeling it as too high cost and too complex for practical use. However, these annuities can have uses in a retirement income plan. For retirees expressing preferences for market growth, strategy commitment, asset liquidity, and longevity risk aversion, the variable annuity with a living benefit may serve as a suitable source for a protected lifetime income floor. Thus, this article aims to explain more about these potential uses and provide an understanding about how the guarantees for variable annuities work. Details such as the benefit base, contract value, rollup rate, step-up opportunities, and guaranteed withdrawal rates are explored to provide readers with a better sense of how to assess available variable annuity options and when they may be appropriate for a client.