While many people are satisfied with fixed and variable annuities as written, you can adjust your contract terms by adding annuity riders. A GMWB annuity rider can help protect you from market losses by guaranteeing a stream of income based on your initial investment, regardless of annuity performance.

For risk-averse individuals who want to prepare for retirement today, a GMWB rider could be the future-proofing tool your personal finance strategy has been waiting for.

What is a GMWB Annuity Rider?

A guaranteed minimum withdrawal benefit (GMWB) rider gives an annuity contract holder the option to withdraw a guaranteed percentage of their annuity principal even if their account value drops.

This option allows you to access funds without actually annuitizing your savings, providing flexibility not offered when you annuitize your contract. For example, most GMWBs allow you to start, stop, or change your withdrawal amount at any time.

GMWB riders may levy additional fees that typically run 0.5%-1.0% per year.

Note: Riders may be subject to eligibility and underwriting requirements, additional premium requirements and/or minimum or maximum coverage amounts. Availability and rider provisions may vary by state.

How Do GMWBs Work?

The purpose of a GMWB rider is to ensure the annuitant receives, at minimum, the money they initially paid into the contract. With the rider attached, you have a contractually guaranteed benefit even if the annuity loses all of its value due to market performance.

For example, say you put $100,000 in a variable annuity you intend to hold for 10 years. A series of investment losses drops the annuity's account value to $90,000 after 10 years.

Without a GMWB, your income stream after annuitization will be based on the lower $90,000 amount. With the rider, you'll be able to withdraw an annual fixed percentage based on the higher $100,000 amount.

A GMWB rider creates a separate value from the annuity's account value. This value is typically called a benefit base. In the above example, your annuity's account value is $90,000 while its benefit base is $100,000. This enables the annuitant to select the higher value from which to draw income.

This rider is most often used with variable annuities, which are vulnerable to market risk. GMWBs can also be attached to indexed annuities, as several years of poor performance by the underlying index can negatively impact the annuity's income potential.

Annuitants can use a GMWB rider to guarantee annual income based on a set percentage of their contract principal. This percentage usually increases with age, up to a cap of around 10%.

For example, if you activate your GMWB at the age of 60, you may only have permission to withdraw 4% of your investments per year. Wait until you’re 65, and the max annual percentage could increase by half a percentage point or more.

Annual withdrawal amounts are calculated by multiplying your maximum withdrawal percentage against the original amount you paid to fund your annuity.

Even if a volatile market decreases your total account balance, your benefit base and annual withdrawal amount stay the same. Your benefit base will decrease when you withdraw from the GMWB rider by the amount withdrawn.

How Changes to Your Benefit Base Affect GMWB

There is one notable exception to the minimum withdrawal threshold. For payments to stay the same, you can’t take out more than your predetermined GMWB benefit.

Withdrawals over that amount eat into your principal and may reduce your future withdrawal potential.

Some GMWB riders also include a “step-up provision” that allows you to lock in a new, higher benefit base. This is possible if you have a variable annuity that has increased in value thanks to positive market performance after you have activated the GMWB rider.

If you have this provision and choose to use it, your maximum withdrawal percentage remains the same, but the principal that percentage applies to will now be larger. And just like the original minimum withdrawal amount, your new minimum withdrawal won’t decrease even if the market experiences a downturn.

Core Benefits of Choosing a GMWB Rider

In addition to the main advantages of purchasing an annuity, you can stack these perks associated with a GMWB rider.

• You retain control. Making withdrawals under the GMWB does not require annuitization. When you annuitize, you lose control of your annuity. With the GMBWB rider, you can change how the annuity invests and even exchange the annuity for another, actions you couldn’t take once you annuitize.
• You have a safety net. The rider essentially enables you to risk retirement savings in the market, and thus potentially earn higher returns than what is offered in a fixed annuity, knowing you have a safety net of a minimum guaranteed amount that you started with.
• You may have immediate access. Most GMWB riders enable you to make withdrawals in the first year. Some companies will add value to your benefit base if you do not take withdrawals in the early years.

Disadvantages of GMWB Riders

As you consider adding a GMWB rider, keep in mind that:

• It may limit your investment options. Some insurance companies may limit which of the variable annuity's subaccounts you can invest in if you add the rider. This is done to lower the risk of market losses causing the rider benefit to kick in.
• You may possibly pay for nothing. A GMWB rider is kind of like buying insurance on your annuity. It's only a benefit if your annuity loses value due to market performance. If your annuity value grows, you will have paid for a benefit you won't use.

How Much Do GMWB Annuity Riders Cost?

The insurance company that manages your annuity may charge a GMWB rider fee of 0.5-1.0%. Exact costs depend on your annuity contract, the details of the rider, and the withdrawal percentage you’re offered. Higher percentages usually equal higher fees.

Annuities may be subject to surrender charges and IRS penalties if you withdraw money before the age of 59 ½. This is true even if you have a GMWB rider.

Each insurance company determines its own surrender fee schedule, but in general, these fees decrease every year after funding your annuity. You may pay a 7% fee on the total withdrawal amount if you withdraw money in the first year, 6% in the second year, 5% in the third year, and so on.

GMWB vs GLWB

It’s important not to confuse a Guaranteed Minimum Withdrawal Benefit (GMWB) with a Guaranteed Lifetime Withdrawal Benefit (GLWB). People who write about or sell annuities often use these terms interchangeably, but they are not the same.

The most important difference is that the GLWB provides guaranteed lifetime income regardless of the underlying annuity’s performance.

A GMWB, on the other hand, only guarantees that you’ll receive your initial investment amount over a series of payments. GMWB riders are not lifetime income sources. Once your annuity payments equal your initial investment amount, your payments will stop.

GMWB vs. GMIB 

It’s easy to confuse GMWBs with guaranteed minimum income benefits (GMIBs). Not only are the acronyms similar, but both riders are used to provide financial security to the annuity holder.

But the two riders tackle that promise differently.

While GMWBs allow for guaranteed withdrawals that represent a percentage of the annuity’s principal, GMIBs guarantee a minimum income dollar value based on a percentage of the initial premium or the annuity account value, whichever is higher.

With GMIBs, the insurance company is essentially guaranteeing payments based on the future value of your original premium plus compounded interest.

• GMWBs and GMIBs both deliver their benefits regardless of how well the annuity has grown.
• Both GMIBs and GMWBs are most often added to variable or fixed-indexed annuities to help protect the future value of the annuity in the event of poor market performance.
• GMIB income is usually available after annuitization plus an additional deferral period that sets aside time for account growth before payouts begin. GMWBs activated after the age of 59 ½ may be available immediately.

Keep in mind that the more riders you tack onto your annuity contract, the more you may pay in fees. Options like a death benefit or cost-of-living rider may make you feel more secure and help provide for loved ones, but be sure you can comfortably justify the additional costs.

Choosing Annuity Riders: Is a GMWB Rider Right for You?

The promise of guaranteed income can be tantalizing. The idea that you can set aside worries over market performance and know you’ll enjoy a guaranteed lifetime withdrawal benefit could have you rushing to sign on the dotted line.

But as useful as annuities and their add-ons can be, they’re at their most effective when you’ve carefully chosen the options that best align with your goals and needs.

To get more information on annuities, types of annuity riders, and the basics of retirement planning, talk to one of Annuity.com’s trusted annuity experts.

Note: All guarantees are subject to the claims-paying ability of the insurer.