Guaranteed Withdrawal Benefits, or GMWB, are options in some segregated fund contracts that allow the policy holder to receive a guaranteed income for life. These types of contracts can be appealing for retirees looking for a guaranteed income stream and who are nervous of market fluctuations.
Guaranteed Minimum Withdrawal Benefits is a product that was developed to act as both a traditional investment and an annuity. They offer policy holders a guaranteed minimum income from their savings each year, while also allowing them to benefit from investment gains in their portfolio. This is how they work:
Investor Deposits Lump Sum
Investors deposit a lump sum of money into the investment contract, usually pre-retirement. At this point, the money is invested as usual and the investor will need to choose investments. It is typical for these types of contracts to restrict the amount of equity exposure the investment can have.
Guaranteed Income Starts
Once the funds have been deposited into the contract, the policy holder is entitled to a certain level of income starting at a specific age. This is usually age 65 but varies. The guaranteed income offered in these contracts is typically 4-5% of your savings. The income lasts indefinitely. This addresses many peoples concern about outliving their money.
Increases in the GMWB
There are two ways to increase your guaranteed benefit. The first way is a by a 5% annual bonus. This bonus is applied for every year that you don’t take the benefit. The bonus is typically only available for the first 15 years of the contract. These features do vary by company.
The second way to increase the benefit is by locking in investment gains. Typically, every 3 years (though this may vary by contract) you will have an option to “lock in” the market value of your contract. This allows you to take advantage of any investment gain. The result is having a higher amount to base your GMWB on. Once it is locked in, the benefit will always be based on this amount, even if the market value of the portfolio were to decline.
The Payments Begin
Typically, around age 65, the investor will start making their withdrawals. These payments will be made up of the GWMB agreed upon when the contract was established, as well as any bonuses. This will also account for any locking in. These withdrawals may decrease the market value of your investment, but not the amount used to determine the guaranteed income.
The payments end at the time of your death. At this time, your named beneficiaries will receive the remaining market value of your contract.
Guaranteed Minimum Withdrawal Benefits can be a good solution for some retirees looking to secure a guaranteed retirement income. It is important to note that these contracts tend to have significantly higher investment fees than a regular investment contract. There can also be stiff penalties for any withdrawals taken above and beyond the GWMB amount.