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Case Study: How A Gmwb Rescues A Client's Retirement

Most of my clients are younger and not yet taking income out of their portfolios. But there is one exception. This client, in her early 60s, knew she needed income within four to five years and could not take another loss with her account. So, she invested in a variable annuity with a living benefit rider called a guaranteed minimum withdrawal benefit (GMWB).

This was purchased in the first quarter of 2007, at a time when the markets were booming. Then, as if it needs mentioning, 2008 and the demise of the equities and bond markets began. The economic turbulence that ensued was catastrophic. Even those whose assets were allocated very well were negatively affected.

This was a case that illustrated when a variable annuity’s guaranteed rider can ensure a secure retirement.

Because my client had contributed to an annuity before the economic downturn, my client was able to take advantage of a number of quarterly market step-ups early, locking in gains on her GMWB. It’s worth noting that the living benefit included on this annuity credits her the highest quarterly market value, or 6 percent interest for the year. Once the year is over, the company looks back at each quarter’s market performance and steps up the withdrawal base if the market increased by more than 6 percent. In the event there is no quarterly step up, a 6 percent increase is credited at the end of the year. These are stackable benefits as well.

My client initially deposited $336,749 into the annuity. When she began taking money out of the plan in February 2011, her account balance was at $243,311, but her annuity’s GMWB totaled $378,321. She was 66 at the time. With her GMWB at $378,321, she was allowed to withdraw 5 percent from this amount, giving her a monthly withdrawal of $1,681 for a total of $20,177 per year. (Please note that the rider charge is calculated from the actual GMWB amount as opposed to the original account value.)

With this particular annuity, once you reach age 65 and then hit your next contract anniversary date, you are able to withdraw 5 percent on the guaranteed withdrawal amount for life, regardless of whether the account balance drops to zero. So, being a single woman, my client is able to live comfortably because she will receive $1,681 each month for life along with a monthly Social Security benefit of $2,400. We built a personal pension plan for her that she knows will be consistent and available to her for as long as she lives.

One of the most difficult parts of my job as an advisor is explaining how the benefits of this product work. When I first approached my client with this annuity in 2007, she was pretty confident in my recommendation, but it took some time for her to wrap her head around the idea. It’s fairly typical for a person to wonder how it’s possible for the benefits to work the way they do. My response? As long as the annuity is backed by a reputable insurance carrier, the payouts are completely feasible.

However, trusting that the carrier is going to be there has become a bigger issue as of late, given the struggling economy. This makes it all the more necessary for advisors to seek out A-rated companies that have been in business for an extensive period. Some of these companies are foreign-based, not having been affected by the mortgage problems experienced in the United States.

Once the carrier to back the annuity has been selected, it is important to be sure the product will pay out over a long period of time. If your client wishes to take out all of his money at a later date, he is not going to get the guaranteed withdrawal base amount. Instead, he will receive his account balance, just as he would if he were to take all of his money out of a 401(k).

Additionally, there are different payout percentages based on what age you begin withdrawing money from the annuity – from 4 percent to as much as 7 percent. At age 65, you typically will reach a 5 percent payout. If you reach age 75 without taking withdrawals, the payout might jump to 6 percent. At age 85, it goes to 6 or 7 percent, depending on the insurance carrier. Therefore, if you wait long enough to begin taking money out of your annuity – say until age 75 – you could get 6 percent of your guaranteed withdrawal base for life.

Consider recommending variable annuities with guaranteed minimum withdrawal benefits to your clients approaching retirement. With a clear understanding of the advantages of this product, your clients can have the peace of mind so many of mine will enjoy one day – knowing they’ll be financially independent for life.

David L. Goodrich, LUTCF, is a seven-year MDRT member from Richardson, Texas. He is founder of Goodrich Financial Services, an independent brokerage agency specializing in insurance, estate and retirement planning solutions. Disclosure: VUL should be sold [email protected].

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