A new style of investment has been Sweeping the Investing World and it is called a GMWB, or a Guaranteed Minimum Withdrawal Benefit product. A GMWB is similar to a Life Annuity but with many additional features. Generally when you invest in a Life Annuity you are giving up care and control of your Investment to the Insurance Company, in return for a Guarantee of Income for Life.
Once you invest in a Life Annuity though, you really dont have any future control over the Annuity, and would not be able to change the investment direction or any features of the Annuity once it has been purchased. A GMWB on the other hand allows you to get similar Lifetime Income Guarantees as an Annuity, but also allows you a lot more flexibility in the Growth & Income stage of the Investment.
In most all cases the GMWB providers will give you a base Income Bonus of 5% for every year you allow the investment to sit in its accumulation phase. This makes a GMWB Ideal in very Low Interest Rate & Turbulent Market Environments, as current GIC rates hover between 1 & 2% and Markets can fall 2% in a day. With the reality that we are only Saving to create an Income at some point in time, having the base income guarantee of 5% far outweighs any additional costs associated with a GMWB product.
All GMWB products charge a fee on an annual basis to over insure & protect the 5% Guarantee, but the fee usually only hovers anywhere from .25% up to 1.15% for the more expensive Equity Based Products such as in Manulife’s IncomePlus program. But for the peace of mind you receive with a guaranteed product in its growth, and also with the guarantee of Income for Life combined with all the opportunitites of greater returns from the stock market, a mere 1/4% to have this peace of mind should be a no brainer.
A GMWB can also offer you a greater deal of flexibility into retirement, with the ability to make withdrawals in addition to the guraranteed lifetime withdrawal amount. The excess withdrawals will reduce the amount of guaranteed income into the future but at least you can make additional withdrawals out of the account. With a Lifetime Annuity, there is no such opportunity. This creates an opportunity to cover some of life’s additional expenses, such as a new car, a kitchen renovation or retrofitting your home in the case of life’s unexpected events.
Another benefit of a GMWB over a Life Annuity, is the balance of the account that you do not use within your lifetime, will be passed to your beneficiaries, and not to the benefit of the Life Insurance Company. Most Life Annuities carry a 10 year guaranteed payment period, but if you pass away in your 11th year, then the Insurance Company benefits greater than you or your family would have. You will likely get a lower initial amount of guaranteed income out of a GMWB than you would out of a Life Annuity, but the GMWB has the ability to grow over time through the markets and can even potentially give you a greater return than a Life Annuity ever could.
If you use a GMWB strategy with your RRSP, you guarantee that you will never run out of money! This is not true for an average Mutual Fund RRSP which turns into a RRIF. The Government has a very defined schedule of how much money you must take out of your RRIF every year, so that the tax that lives inside of the RRIF will slowly but surely be paid back to the Government. But as you get older the amount you must withdraw from your RRIF continues to climb. As an example when you are 65 your RRIF minimum withdrawal is only 4% of your account, but when you are in your 80’s that minimum climbs in excess of 10% per year, so you can see, it could only take 10 years throughout your 80’s to completely deplete a typical RRIF invested in a normal Mutual fund. With a GMWB the Insurance Company will continue to pay your minimum withdrawal benefit for life, even if the account is completely exhausted.
With all of the benefits of both growth and guaranteed income from a GMWB, it is not hard to see why it has amassed Tens of Billions of dollars over the last 4 years. With all of the competition between companies to attract your business, this site should be your First Resource to see which companies may best fit both your goals and your values, both today and into your retirement years. Although it’s not necessary to put all of your retirement funds into a GMWB (minimum investments start from $5,000), it should be a very complimentary strategy to ensure you never run out of income, a Personal Pension of sorts.
General Summary of a GMWB
- You can Invest as Little as $5000 into a GMWB
- You are given a Minimum Income Base of 5% (Compounded) or Market Value for every year you stay invested
- Once you are ready to turn your Savings into Income, you are guaranteed Income for Life, no matter how old you live
- There are hundreds of Investment Choices you can make, so variety won’t be a problem
- The balance of your Account goes to your Beneficiaries, not the Insurance Company
- You can never run out of your RRIF, no matter how old you get