We’re often asked what an annuity guaranteed lifetime withdrawal benefit is. Simply put it’s a rider that is attached to either a variable annuity or an equity-indexed annuity that allows you to receive an annual withdrawal throughout your lifetime. It’s called a living benefit as the withdrawals can occur for the rest of your life even if the annuity’s account value decreases or is exhausted. But there are some caveats. Annuity guarantees, including guarantees associated with benefit riders, such as the guaranteed lifetime withdrawal benefit, are subject to the claims-paying ability of the annuity issuer. And withdrawals made prior to age 59 ½ may be subject to a 10 percent federal penalty tax.
While fixed income riders provide peace of mind on paper, standard distributions lack protection against sharp macroeconomic pricing spikes. Evaluating these tools inside a structured goal-based wealth planning framework allows you to stress-test your guaranteed income against real-world cost-of-living inflation.
Wealth Stewardship Alert
Is Rising Inflation Quietly Destroying Your Guaranteed Retirement Income?
Unindexed fixed income structures look safe on paper, but unexpected inflation spikes can rapidly slice your real purchasing power in half. At Stone Oak Wealth Management, we utilize our proprietary Wealth Framework to stress-test your income streams against cost-of-living adjustments and eliminate underlying product fees.
2 Core Ways Rising Inflation Decreases Fixed Annuity Purchasing Power
Rising inflation decreases fixed annuity purchasing power by freezing income distributions at a flat rate while the real cost of living increases. Because standard fixed annuity structures lack built-in cost-of-living adjustments (COLA), unexpected macroeconomic pricing spikes rapidly erode an individual’s real-world retirement lifestyle and cash flow sustainability.
Fixed annuities do not protect against inflation. Fixed annuities provide a fixed rate of return on the individual’s investment and do not adjust the income payments based on changes in the cost of living. What this means to you is that the purchasing power of the individual’s retirement income may be reduced over time as inflation increases. As recent years have taught us, the rate of inflation is not consistent; it can skyrocket! If this is a concern and you are worried about protection against inflation, you should look into an inflation-protected annuity.
Another valid question is whether or not annuity payments increase with inflation. That depends totally on the type of annuity you have. Some annuities, such as inflation-protected annuities, are specifically designed to increase income payments over time to keep up with inflation. The income payments of these annuities are linked to a benchmark, such as the Consumer Price Index (CPI), which measures the change in the cost of living over time. As the cost-of-living increases, the individual’s income from the annuity increases also.
4 Hidden Fees to Evaluate Before Buying Variable Annuities
Variable annuities are long-term investments suitable for retirement funding and are subject to market fluctuations and investment risk, including the possibility of loss of principal. They generally contain fees and charges which include, but are not limited to, mortality and expense risk charges, sales and surrender charges, administrative fees and charges for optional benefits and riders. Since variable annuities are sold by prospectus, you’ll need to consider the investment objectives, risk, charges and expenses before investing.
As you can see, annuities come in all shapes and sizes with their own set of caveats including the effect inflation has on them. You need to sit down with your wealth management advisor to discuss all the options open to you and which would best suit your financial goals.
- A guaranteed lifetime withdrawal benefit (GLWB) is a rider attached to a variable or equity-indexed annuity that allows you to take annual withdrawals for the rest of your life… even if the account value drops to zero.
- Annuity guarantees, including GLWB riders, depend on the claims-paying ability of the issuing insurance company. They are not backed by any government agency.
- Fixed annuities do not protect against inflation. They pay a set rate of return and do not adjust income payments as the cost of living rises, which means purchasing power can erode over time.
- Inflation-protected annuities are designed to increase income payments over time, often tied to a benchmark like the Consumer Price Index (CPI).
- Variable annuities are subject to market fluctuations and investment risk, including potential loss of principal. They carry fees such as mortality and expense charges, administrative fees, and charges for optional riders.
- Withdrawals from annuities before age 59½ may be subject to a 10% federal penalty tax, in addition to ordinary income tax.
- Whether an annuity is right for your retirement income plan depends on your goals, timeline, and risk tolerance. A wealth management advisor can help you evaluate your options.
Frequently Asked Questions
What is a guaranteed lifetime withdrawal benefit?
A guaranteed lifetime withdrawal benefit (GLWB) is a rider you can add to a variable or equity-indexed annuity. It allows you to take a set annual withdrawal for the rest of your life… even if the annuity’s account value is eventually reduced to zero. It’s considered a “living benefit” because you receive income while you’re still alive, not just at death. Keep in mind that these guarantees depend on the financial strength of the insurance company issuing the annuity.
Do annuities protect against inflation?
It depends on the type. Standard fixed annuities do not protect against inflation. They pay a fixed rate of return regardless of changes in the cost of living, so the purchasing power of your income can decrease over time as prices rise. Inflation-protected annuities are specifically designed to address this, with income payments that increase alongside a benchmark like the Consumer Price Index (CPI).
Will my annuity payments increase if inflation goes up?
Only if your annuity is specifically structured to do so. Inflation-protected annuities link income payments to a cost-of-living measure, so payments rise as inflation rises. Most fixed annuities do not offer this feature. Variable annuities may offer some growth potential through market participation, but they also carry investment risk and do not guarantee income increases tied to inflation.
What are the risks of a variable annuity?
Variable annuities are long-term investments subject to market fluctuations and investment risk, including the potential loss of principal. They typically carry multiple layers of fees… including mortality and expense risk charges, administrative fees, sales and surrender charges, and fees for optional riders. Because they are sold by prospectus, you should carefully review the investment objectives, risks, and costs before investing.
When should I talk to an advisor about annuities?
Before making any annuity decision. Annuities vary widely in structure, cost, and suitability depending on your retirement income goals, tax situation, and risk tolerance. A wealth management advisor can help you compare options… including fixed, variable, and inflation-protected annuities… and determine whether any of them belong in your retirement plan.
Sources: Broadridge Investment Management Solutions, Annuity.org (July 12, 2023 post)
Stone Oak Wealth is regulated by the SEC as a registered investment adviser. Please see visit Legal Disclosures for additional advertising disclosures.