What are Guaranteed Withdrawal Benefits And Lifetime Income Riders?

Riders provide guaranteed retirement Income without losing access to principal

Walking the tightrope - using insurance to guaranteed your retirement income.
Withdrawal benefits are a form of insurance. Gary Waters / Getty Images

There are plenty of ways to create retirement income, but only a few of them come with guarantees.

Guaranteed withdrawal benefit riders and lifetime income riders are features offered with some variable annuity contracts - and they can be quite appealing because they do just that; they guarantee lifetime income.

They are called "riders" because they are contractual guarantees attached to the insurance contract (an annuity is an insurance contract).

They are insuring that you do not outlive your money. Here's how they work.

Wallet 1 vs. Wallet 2

These income riders work by creating what I call "Wallet 1" and "Wallet 2". Wallet 1 is real money. If you surrender the annuity that is what you get. 

"Wallet 2" is an accounting entry referred to as your "income base". It is not real money. It is an accounting method used to calculate the amount of guaranteed income you can withdraw if you activate the rider. There is typically a withdrawal percentage that is tied to your age.

As an example, the rider might specify you can withdraw 4% of the greater of the actual contract value (Wallet 1) or the income base (Wallet 2) if you begin taking withdrawals between 60 and 64, 4.5% if you begin between 65 and 69, and 5% if you begin taking income at 70 or later.

Wallet 2 is used to provide a minimum known outcome (insurance), but if the investments do better than the guarantees provided by Wallet 2, then your income could be greater than the minimum amount.

Finding an Annuity with an Income Rider

They are some really great products out there, but as with any investment, do your homework first. When looking for a variable annuity that offers a guaranteed withdrawal benefit rider or lifetime income rider, here’s what to look for:

  1. Understand the terms of the rider.
    Lifetime income riders may be referred to using several different terms, and a lifetime income rider is not the same as a guaranteed minimum withdrawal benefit. To understand the difference, read Lifetime Income Benefit Description.
     
  1. Low fees.
    The total fees you pay on an annual basis, including any fee paid to your advisor, should be 3% a year or less. To see a list of all fees you could incur read Variable Annuity Fees and Expenses.
     
  2. No Annuitization Required
    You want to find a guaranteed minimum withdrawal rider of lifetime income rider that does not require you to annuitize your contract in order to exercise the rider. What does that mean? It means you can withdraw a guaranteed amount each year (5% for example), but if you needed to, you could still access your remaining principal (although doing so may reduce the amount of guaranteed income you could withdraw). It also means upon your death, any remaining funds are still available to pass along to heirs.
     
  3. An annual step up that locks in your income base.
    This feature means your future income can only go up, not down. How does it work? Each year on your contract anniversary, the annuity company takes a look at your account value. If it is higher than it was the year before, the new amount becomes your income base upon which the guaranteed withdrawal benefit or lifetime income rider is calculated. If the contract value is less than it was the year before, your income base remains as it was, so your income base cannot go down; only up.
     
  1. An insurance company that has quality ratings.
    A guarantee is only as good as the company that issues it. Historically, insurance company guarantees have been something you can rely on. To be safe be sure to buy from companies that have quality ratings. For an additional layer of safety some people prefer to choose two or three quality insurance companies that offer policies with the features described above, and spread their money across them.

If you're looking for an annuity that has a guaranteed income feature I'd recommend searching AnnuityFYI, which keeps an updated list of competitive annuities that offer either a guaranteed minimum withdrawal benefit or lifetime income rider.