Client outcomes

A case for variable annuities with guaranteed lifetime withdrawal benefits

May 29, 2024
A couple sitting on a couch reviewing their finances

Key Takeaways:

  • The 3 main categories of risk in retirement income planning include market volatility, longevity, and spending shocks.
  • Our case study found that repositioning 40% of a portfolio to a variable annuity with an income rider increased the probability of achieving the income goal.
  • Utilizing lifetime income protections and investments can lay a strong foundation for retirement.

Variable annuities with guaranteed lifetime withdrawal benefits are gaining momentum among financial professionals by providing an effective approach to longevity risk management. Because your clients need a specific amount to be able to live comfortably in retirement, adding a variable annuity can help guarantee income for life. Your clients don’t know how long they’ll live, and they can’t usually predict market returns that’ll impact their investment portfolios during retirement. In this blog, we’ll look at the role for variable annuities with guaranteed lifetime withdrawal benefits to be used as a source for risk pooling as part of a retirement income plan. Current variable annuities with income protections could be an option for your clients.

Key client needs for retirement income

When designing a retirement income plan, you can think of the needs you’re trying to address for your clients by remembering these 4 Ls:

  • Lifestyle: provide income that can maintain the client’s lifestyle
  • Longevity: keep the income going for as long as your client lives
  • Liquidity: have enough in reserve to pay unexpected expenses
  • Legacy: leave something behind for loved ones or the community

Managing risk in a retirement income plan

The 3 major categories of risk for a retirement income plan include market volatility, longevity, and spending shocks. Different viewpoints exist regarding the best approach for managing these risks when building a retirement income plan. Retirement is an actuarial problem, because your clients can’t accurately predict the kind of market returns that they’ll encounter once retired. Investment oriented focuses and incorporating an insurance product are 2 approaches utilized by financial professionals:

Investment-oriented focus

Some financial professionals maintain an investments-oriented focus for their clients. With investments-only strategies, retirement risks are generally managed by spending less in retirement, as longevity risk is managed by assuming a long life and market risk is managed by assuming poor market returns. Planning for worst case scenarios like this can make retirement more expensive for clients, requiring a larger amount of assets to feel comfortable that the retirement plan will work. An investments-only focus overstates the willingness and comfort of the retirement-aged population to stay the course with a volatile investment portfolio in the face of unknowns.

Incorporating Insurance products

While some may focus more on an investments-only approach, there’s also the practice of incorporating insurance products to manage risk. Because insurance companies can pool the risks of many retirees, clients would be able to spend as though they’ll experience average returns. For many financial professionals oriented toward investments, a common view is that risk pooling is unnecessary because the stock market is expected to perform well over time. However, after distributions begin any downward volatility in the early years of retirement can disproportionately hurt the sustainability of a retirement spending plan.

A blend of the two

A blended approach to building retirement income plans with both lifetime income protections and investments can lay a strong foundation for retirement success without sacrificing long-term asset growth. Lifetime income protections can help to manage market volatility and investment risks, to protect from longevity risk, to more efficiently earmark assets to cover retirement spending, to reduce the fear and worry that clients many have about outliving their assets in retirement, and to simplify the financial plan.

In a case study by Wade Pfau, he found that repositioning just 40% of a portfolio to a variable annuity with an income rider significantly increased the probability of achieving the income goal. See the chart below:

Variable annuity fees

There seems to be a common concern among financial professionals about the costs associated with variable annuities. However, our case study examples indicate that their insurance features can improve retirement outcomes. When perceived within a comprehensive retirement income plan, these annuities can render potential growth, buffer against market volatility and justify a higher stock allocation for retirement income. This benefit suite can lead to a higher retirement plan success rate, a bigger legacy value for assets and a reduced risk of spending shortfalls. The expenses of a variable annuity may be worth it, depending on your clients’ goals, risk tolerance, and the guaranteed income that they’ll need in retirement.

What are deferred variable annuities with guaranteed lifetime withdrawal benefit riders?

Variable annuities equipped with income guarantee riders are increasingly becoming a favored choice for securing a robust retirement plan. As a reminder, these products provide a combination of downside protection with a guaranteed income stream, upside growth potential through the underlying subaccount investments, and potential liquidity for the underlying assets, while also offering for tax deferral. Clients can see their account values, continue to invest in stocks, bonds, and other asset classes within the annuity subaccounts, and any funds remaining at death are available to beneficiaries as a death benefit.

  • An income guarantee rider supports an income for life at a fixed withdrawal percentage (based on the age when lifetime distributions begin) of the income benefit base. The income benefit base is the high watermark amount used to calculate the guaranteed withdrawals. It initially equals the premium paid into the annuity, which is the initial contract value for the assets.

Over time, the contract value of assets can rise or fall depending on realized investment returns and as fees and distributions are taken from the asset base. On any contract anniversary, if the contract value of the underlying assets has reached a new high watermark and exceeds the income benefit base, that base is stepped up to this new high watermark value. This increases the subsequent amount of guaranteed income. If the retiree doesn’t take out more than the guaranteed withdrawal amounts, guaranteed withdrawals never decrease, even if the account balance falls to zero. The owner may distribute more than the guaranteed amount, which will lead to a proportionate reduction in what is subsequently guaranteed. During the accumulation period before distributions begin, a variable annuity may also offer a guaranteed roll-up rate to increase the income benefit base automatically over time if the contract value of the underlying assets has not otherwise grown to exceed this guaranteed roll-up.

So what’s the verdict?

When it comes to variable annuities with guaranteed lifetime withdrawal benefits, concerns about cost are valid, but costs can be viewed in terms of the value they provide as a risk mitigation tool. Current variable annuities with income protections could be an option for your clients and their goals for retirement.

Is an investments-only strategy with lower internal fees preferable if its approach to managing longevity and sequence risk means that the client must either spend less or delay financial independence because it is necessary to earmark a larger overall asset base to ensure that retirement spending goals can be covered? That’s the context in which to assess fees: Can they support better outcomes through risk pooling that reduces the overall costs of the plan in terms of the asset base required to meet the financial goals of retirement? Our simulationsshow that the answer to this question can indeed be yes.


  • Guarantees are subject to the claims paying ability of the issuing insurance company.

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    Using Variable Annuities with Guaranteed Lifetime Withdrawal Benefits in a Retirement Portfolio, Wade D. Pfau, Ph.D., CFA, RICP