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Pensionize Your Nest Egg: How to Use Product Allocation to Create a Guaranteed Income for Life, 2nd Edition by Moshe A. Milevsky, Alexandra C. Macqueen

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8 Introducing the Third Silo—Annuities with Guaranteed Living Benefits

We have discussed pensions and annuities in considerable detail. We’ve also provided a brief overview of the nonguaranteed (i.e., stock and bond) silo, which is likely how you’ve saved for retirement so far. Now we are going to spend a little more time looking at another way to get guaranteed lifetime income, through the “hybrid” silo of retirement income products that provide both lifetime income and exposure to financial markets.

Guaranteed living benefits, or GLBs, were first introduced in variable annuity (VA) contracts in the late 1990s to allow the owner to receive lifetime income, often without having to “annuitize” the contract (i.e., lock the payments in for life). The two most popular living benefits are the guaranteed lifetime withdrawal benefit (GLWB) and the guaranteed minimum income benefit (GMIB). Both of these optional riders, added onto VA contracts, allow for the potential for growth in an up market, incentives for delaying income, and a modest lifetime payout. More recently, another form of hybrid product, the fixed indexed annuity with a guaranteed living benefit, has emerged as a way to create retirement income.

Before we go any further, let’s pause for a moment to define our terms here—after all, we’ve just spent Chapter 6 telling you all about life annuities. What are variable and fixed indexed annuities, and how are they different?

In brief, a variable annuity is an insurance contract ...

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