The Cost of Guaranteed Income: Demystifying the Value Proposition of Variable Annuities with Guaranteed Lifetime Withdrawal Benefit (GLWB) Riders

Variable annuities (VAs) are among the most complex and controversial products in the investment universe. Although a fair amount of research regarding the merits of VAs with guaranteed lifetime withdrawal benefit (GLWB) riders has been published over the past decade, to date, few of these papers have been of practical usefulness in guiding consumer decision-making. This paper begins to fill this information gap by (1) identifying the circumstances under which VA contracts with GLWBs seem most rational, and (2) helping consumers and practitioners assess the relative merits of various “real-world” guaranteed lifetime withdrawal riders. Our analysis applies bootstrapping techniques to compare a spectrum of three common forms of GLWB riders and two non-guaranteed index model portfolios. The primary underlying assumption in the study is that the GLWBs are utilized exactly as they are marketed – with a 10-year accumulation period followed by lifetime fixed withdrawals. The results of this analysis are surprising and may reshape practitioners’ product recommendations, as well as the public perception of annuity expenses.