Vanguard Enters the Guaranteed Lifetime Income Space

Lots of insurance companies sell variable annuities. Because the fees are high, they make a lot of money in the process. Baby boomers who are approaching retirement are a huge market for annuity companies. However, a lot of us have been (finally) educated about the negative aspects of variable annuities and have resisted buying. Then came the Guaranteed Lifetime Withdrawal Benefit (GLWB) rider. This changed the annuity landscape.

The guaranteed lifetime benefit feature gives the annuity owner the right to a lifetime payout this is percentage of a “total withdrawal base” amount.

The big investment companies see the guaranteed lifetime benefit riders as a way to increase the appeal of their own variable annuity products. They already offer variable annuities so they typically partner up with an insurance company to provide the rider.\

Vanguard has now done this with Monumental Life Insurance Company to offer its version of guaranteed lifetime retirement income to variable annuity owners. The marketing approach is that the annuity purchaser can withdraw a fixed percentage of a”total withdrawal base” during his or her lifetime, even if markets are bad or the annuity’s principal runs out. They also say that the “total withdrawal base” can increase if the market performs well. The withdrawal percentage is based on the age of the first withdrawal which can be as early as age 59.

To make this product more attractive to a married couple, the purchaser can choose a joint life option. This extend the lifetime income benefit to the spouse, although at a lower annual withdrawal percentage compared to a single life benefit.

Vanguard is currently charging a rider fee of 0.95% of the annuity’s total withdrawal base each year. I would certainly investigate whether this fee is locked or can increase. Keep in mind that 0.95% is a significant cost over time, particularly given the low investment returns now being offered. You are allowed to drop the rider and the fee any time.

Here is one example of how the guaranteed lifetime retirement income benefit works, as provided by Vanguard:

The annuitant of a variable annuity with a total withdrawal base of $150,000 elects to purchase the GLWB rider when he’s 65, and he immediately begins taking withdrawals at a 5% withdrawal rate. He could then be assured of annual withdrawals totaling at least $7,500 per year for life, based on the value of his designated investments when he elected the benefit. Even if the total value of the investments falls because of poor market performance, the $7,500 of withdrawals could continue.

One feature of the variable annuity product compared to a fixed annuity product is that in many cases, you are allowed to withdraw more than your guaranteed annual withdrawal amount, if you need the money and are willing to accept lower future benefits.

Vanguard is known as an investment company with low costs. That’s what interests me about its entry into this guaranteed lifetime income space.

Here is a link to the Vanguard brochure on this new product. (And no, I receive no benefit from Vanguard.)

Have any of you considered a variable annuity with a guaranteed lifetime income benefit?

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