In Pensionize Your Nest Egg (my review is available here), authors Moshe Milevsky and Alexandra Macqueen argue that retirees should diversify their income across three product silos: annuities, systematic withdrawal plan (SWP) accounts (that hold traditional stocks and bonds) and guaranteed minimum withdrawal benefit (GMWB) products.
Investors have access to plenty of low-cost products when it comes to annuities and traditional stocks and bonds. But that’s not true of GMWB products such as Manulife’s IncomePlus in existence today. These products have two significant drawbacks: (1) High fees and (2) No inflation protection on the withdrawal benefits.
GMWB products charge annual fees that average 3.5 to 4.1 percent depending on the bells and whistles added to the base model. Most of these products also limit the equity exposure in the fund to 70 to 80 percent. The high fees combined with capped equity exposure reduces the odds of the investment resetting at a higher level than the base. So, investors in GMWBs available today are essentially purchasing an annuity without any inflation protection. A period of sustained high inflation in future can easily eat away the purchasing power of the guaranteed income from a GMWB.
Due to these drawbacks, it should be asked if GMWBs even have a role in a retiree’s portfolio. Wouldn’t a retiree achieve better results from purchasing annuities with a portion of the capital and investing the rest in equities?