Guaranteed Minimum Withdrawal Benefits
These segregated funds provide retirees or near-retirees with a future stream of guaranteed annual payments, like an annuity. However, unlike annuities:
- With guaranteed minimum withdrawal benefits (GMWBs), you do not have to give up the capital in exchange for a guaranteed payment that does not increase over time.
- Besides the ability to withdraw remaining capital at any time1, with a GMWB you can invest your money in a portfolio of segregated funds which can provide growth of the original contribution over time
- Moreover, the guaranteed annual income - typically between five and seven percent of the original capital invested once the annuitant reaches age 65 - has the potential to increase through bonus's or resets if the original investment amount grows along with the market. This opportunity to increase the annual payment occurs over set time frames, typically lasting three years, provided the portfolio's value, net of fees, grows during those periods. However, even if the portfolio loses value in that time, the annual payment will never decrease.
- Near-retirees who buy these products and elect to have the annual payment deferred increase the minimum amount on which the annual payment is based.
These products can help you protect yourself against:
- Market return risk: Industry experts consider the five years before and the five years after retirement an especially critical phase for your retirement savings. This 10-year period is often referred to as the retirement risk zone because short-term losses in the years leading up to retirement have a limited time to recover before you begin to rely on them for income. The shorter the recovery period before and after your retirement date, the greater the negative effect these losses have on your ability to sustain income for life. The GMWB guaranteed income amount can help you manage this risk as this amount will not decrease regardless of how your funds perform.
- Inflation risk: The value of a dollar is reduced by inflation. In retirement, this is a concern because expenses can keep increasing when your income is not. The GMWB can help you manage this risk because it can potentially increase your income amount with resets every three years
- Longevity risk: This is the risk that you will outlive your money, and the GMWB guaranteed annual income can help because it provides predictable, guaranteed income, no matter how long you live.
The choice of income product is a personal one and you should meet with your financial planner to determine what income product best meets your needs.
1 For the Great-West Life GMWB product, please note that excess withdrawals will decrease the annual guaranteed income amount and your clients will no longer be eligible for any future bonuses. An excess withdrawal is a withdrawal that exceeds the annual guaranteed income amount. Other companies’ products may have similar or other limits, penalties and/or tax implications. These should be explored with your financial planner when discussing which income product will best meet your needs.
