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Income Annuities versus GLWBs: A Product Comparison

January 17, 2012

by Joe Tomlinson

The table below shows the comparison. Because the initial deposits and income are the same for all strategies, the major difference is the expected bequest values. The shortfalls in present value of a potential future bequest experienced by those who choose the VA/GLWB or the income annuity are comparable to fees for the guarantees, which are also shown. (Present values were calculated using a 5.38% nominal rate, based on the same 65/35 stock/bond mix and .2% expense assumption.)

Comparison of Retirement Income Alternatives

Product Choice

PV Expected Bequest

"Fee" per $100,000
for Guarantee

Unguaranteed Systematic Withdrawal



Cash Refund Income Annuity



Vanguard VA/GLWB with Total Fees of 1.54%




Two implications jump out from these figures:

  • Under the particular pricing structures for these products, the VA/GLWB provides a larger expected bequest than the income annuity. This result is sensitive to VA/GLWB fees, and I'll show an example below where the results are reversed.
  • Guaranteeing an income that lasts for life requires a significant sacrifice of expected bequest value. Advisors and clients need to give serious thought to whether guarantees are worth the cost.

These results are based on an expected lifetime (at age 65) of 20 years; it is worth considering how results vary by lifespan. For this particular example, although the expected bequest is greater for the VA/GLWB than the income annuity at 20 years, the values cross over at about 24 years, and are higher for the income annuity thereafter. As discussed above, the income annuity leaves extra money that can be invested in a side fund, and this money can be expected to keep growing regardless of lifespan. On the other hand, based on the assumptions used here, VA/GLWB bequest values decline over time, which is why the values cross over.