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Most variable annuity products today feature optional “living benefit” riders that guarantee investors a fixed withdrawal percentage, regardless of market performance. While they may seem like a good idea – who doesn’t like a 100% guarantee? – their costs may outweigh their benefits.
The historical odds of using a costly living benefit rider are slim. Investors could get better returns over the life an annuity by simply choosing a low-cost variable product such as Symetra’s Focus VA.
Odds vs. Costs
One common VA rider, the Guaranteed Minimum Withdrawal Benefit (GMWB), guarantees that the annuitant can withdraw a fixed percent of the annuity premium, usually 5 percent to 7 percent, every year for a period of time until the invested amount has been exhausted, regardless of market performance.
Sounds great, right? But according to a study reported in Newsweek, there has never been a 10-year period where a balanced portfolio of stocks and bonds lost money, nor has there been a 10-year period where an all-stock (S&P 500) portfolio lost money.1
Now, factor in the GMWB’s extra cost. With an assumed average rider cost of 60 bps, a $250,000 annuity contract could potentially give up $26,707 over ten years.
Considering the extra costs that living benefit riders incur, and the rarity with which they are actually used, the potential benefit isn’t worth the expense.
Despite these odds, 17 percent of VA’s being sold today are sold with a GMWB attached,2 while only 4 percent of those GMWB are likely being used.3
It pays to compare
Compare a competitor annuity with a GMWB rider to Symetra’s Focus product:
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*GMWB payment amounts include 0.60% GMWB charge above the composite annual fee expenses. This charge is not reflected on Focus VA. Above average returns: 12% year for equities, 7% year for bonds. Average: 8% year for equities, 5% for bonds. Below average: 4% year for equities, 3% year for bonds. Monte Carlo returns based on 1,000 scenarios from historical assumptions.
