At times, dubious financial ideas become best-sellers. Professional financial advisors evaluate these ideas with a critical eye while helping their clients avoid costly mistakes with them. This is the case now with one of the hottest features in variable annuities – a rider called a Guaranteed Minimum Withdrawal Benefit (GMWB). The vast majority of clients who buy this feature don’t understand it, partly because it doesn’t make sense for them.

In choosing a tax-deferred variable annuity, clients participate in a long-term investment accumulation program for retirement. Yet, for the GMWB to make sense, the VA must meet a fundamentally different objective – generating steady retirement income. For purposes of producing retirement income that can preserve purchasing power over time, a VA with GMWB is more costly and less effective than alternatives, including systematic withdrawal plans and immediate variable annuities.

 

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