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Income Annuities versus GLWBs: A Product Comparison

January 17, 2012

by Joe Tomlinson

Effect of VA/GLWB pricing

Vanguard's VA/GLWB is a low-cost product by industry standards, so it is also worth looking at estimated bequests based on an average fee level. I used a total fee of 3.50% (rather than Vanguard's 1.54%) to represent such a product. Raising the assumed fee necessitated a number of other changes to produce comparable numbers. The higher fee reduces the product's potential to generate income increases, lowering my estimate of the expected increase rate from 1.28% to .66%. A matching systematic withdrawal program would involve lower withdrawals and therefore generate higher expected bequests. Less funds would be needed to purchase a matching annuity, freeing up additional funds to invest on the side.

Comparison of Retirement Income Alternatives—Average Fee VA/GLWB

Product Choice

Expected Bequest

Cost per $100,000
for Guarantee

Unguaranteed Systematic Withdrawal



Cash Refund Income Annuity



VA/GLWB with Total Fees of 3.50%




The results are quite clear: At this higher fee level, the VA/GLWB becomes a more costly way to provide guarantees than the income annuity. Income guarantees for these higher-fee versions are typically the same as Vanguard's (5% at age 65), so an unsophisticated buyer may not be aware of the bequest impacts. It is also unlikely that such a buyer would understand the impact on potential income increases in the VA/GLWB.  

The recent addition of a VA/GLWB by Vanguard will definitely strengthen its lineup of retirement income products. Income annuities will meet the needs of those who want maximum retirement income, while the VA/GLWB will work well for those who can give up some income for more liquidity and flexibility. As for the overall retirement income market, I expect the low-cost products like Vanguard's to gain market share, but it will be a slow process. Commission-driven sales of the high-fee VA/GLWBs dominate the market today, and I do not see much appetite for sales forces to give up commissions in favor of improved customer value.

Joe Tomlinson is an actuary and a financial planner and is managing director of Tomlinson Financial Planning, LLC in Greenville, Maine. His practice focuses on retirement planning. He also does research and writing on financial planning and investment topics.

Joe wishes to thank Wade Pfau, Ph.D,CFA, for helpful comments on an earlier draft of this article, and Kelli Hueler, who heads Income Solutions®, for  information on income annuities.