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  • Written By
    Thomas J. Brock, CFA®, CPA

    Thomas J. Brock, CFA®, CPA

    Investment, Corporate Finance and Accounting Expert

    Thomas Brock, CFA®, CPA, is a financial professional with over 20 years of experience in investments, corporate finance and accounting. He currently oversees the investment operation for a $4 billion super-regional insurance carrier.

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    Brandon Renfro, Ph.D., CFP®, RICP®, EA, Annuity.org expert contributor

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    Co-Owner of Belonging Wealth Management

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  • Updated: August 10, 2023
  • 6 min read time
  • This page features 8 Cited Research Articles
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APA Brock, T. J. (2023, August 10). Guaranteed Minimum Withdrawal Benefit (GMWB). Annuity.org. Retrieved June 22, 2024, from https://dev.annuity.org/annuities/riders/gmwb/

MLA Brock, Thomas J. "Guaranteed Minimum Withdrawal Benefit (GMWB)." Annuity.org, 10 Aug 2023, https://dev.annuity.org/annuities/riders/gmwb/.

Chicago Brock, Thomas J. "Guaranteed Minimum Withdrawal Benefit (GMWB)." Annuity.org. Last modified August 10, 2023. https://dev.annuity.org/annuities/riders/gmwb/.

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Key Takeaways

  • A guaranteed minimum withdrawal benefit (GMWB) is an optional income rider that can help mitigate risk on an annuity contract.
  • The GMWB rider protects your annuity’s value if the market drops, ensuring you don’t lose out on your guaranteed principal.
  • GMWB riders are typically paired with variable or fixed index annuities.
  • Typical fees range from 0.5% to 1% per year, but the exact amount will vary depending on the GMWB rider’s provisions.

Variable and fixed index annuities offer attractive growth potential. However, the trade-off for that potential is increased risk, leaving annuity owners exposed to the threat of fluctuating or underperforming markets. 

This uncertainty isn’t ideal for those seeking a secure income stream for retirement, but adding a guaranteed minimum withdrawal benefit (GMWB) annuity rider helps to protect against the risk.

What Is a GMWB Rider?

If the market declines, having a GMWB rider provides a safety net. With a GMWB rider, you can withdraw a guaranteed percentage of your principal, regardless of how much the value of your investment has decreased.

The maximum amount you can withdraw each year with a GMWB varies, but is usually between 5% and 10% of the original lump-sum principal you paid to the insurance company.

Most GMWBs allow you the flexibility to start, stop or change your withdrawal amount at any time. 

PRO TIP

Taking more than the annual guaranteed withdrawal may negatively affect your benefits.

GMWBs and other income riders have become popular additions to variable annuity contracts, with most variable annuities now offering some form of financial guarantee. However, these features are not always automatically included. Moreover, according to the National Association of Insurance Commissioners, riders for variable annuities come with additional costs.

GMWB riders offer protection against market decline. This can be reassuring, but costly too. Whether the tradeoff is worth it depends on your specific needs.

How Do GMWB Riders Work?

GMWB riders give you the ability to make withdrawals based on your principal investment — even if that investment has lost value.

To understand the workings, consider an example. Assume you purchase a $100,000 variable annuity, agreeing to a 10-year surrender period and adding on a GMWB rider with a 5% annual withdrawal guarantee.

During that 10-year period, the markets severely underperform and the annuity’s underlying investments are now worth just $75,000. Without a GMWB rider, you would have lost that portion of your principal.

But, because you purchased the rider, you can still withdraw 5% (or $5,000) per year until your original $100,000 investment is recovered.

Essentially, even though your investment did not grow in value as you had hoped, you are insulated from the loss of principal and have  the ability to withdraw at least 5% per year from the annuity.

Did You Know?

Some GMWB riders allow you to withdraw greater amounts when the market is performing well.

The percentage you can withdraw from your annuity is usually positively related to your age at the time you wish to make the withdrawal. The older you are when you activate the rider, the more money you can take out and still have guaranteed income for life.

For example, say you are currently 65 and waiting to withdraw on your variable annuity with a GMWB rider. If you hold out, your withdrawal benefit may increase to 5.5% at 69 years old or to 6% when you reach 70 years old.

Step-Up Provisions

Some GMWB riders come with a unique feature known as a step-up provision, which gives you the ability to claim more than your principal in payments.

With a step-up provision, if your variable annuity performs well and increases in value, your GMWB rider can lock in on this new, higher contract value. Your minimum withdrawal benefit would then be based on that higher figure instead of the original principal.

Suppose you begin taking a 5% minimum withdrawal benefit on an underperforming variable annuity. After a few years, the portfolio recovers and exceeds its original value. You can now “step up” and begin receiving payments worth 5% of this higher contract value instead of payments equal to 5% of your principal investment.

Your guaranteed withdrawal percentage remains the same, but the actual dollar amount you can take out each year increases if the benefit base increases.

Additionally, even if the portfolio’s value declines in subsequent years, you will still continue to receive payments based on the stepped-up amount.

How Much Do GMWB Riders Cost?

A typical GMWB rider fee can range from 0.5% to 1% each year. The fee will vary depending on the provisions of the rider. Usually, a higher yearly fee equates to a larger guaranteed withdrawal percentage. So, while GMWBs are remarkably effective in protecting against some of the inherent risks of variable annuities, they can be costly. 

Consider that annuity rider fees stack. Other similar income riders, such as a guaranteed minimum income benefit (GMIB), may cost up to 1.5% a year. The more riders you add to your contract, the higher your fees will grow.

GMWB riders offer an effective layer of security, but you will have to weigh how valuable that security is to you versus the price you pay to receive it. 

Other Common Costs and Fees Associated With Variable Annuities

Annuity Account Fees
This fee is usually small and often waived once your contract value exceeds a certain level, such as $50,000.
Surrender Fees
This generally only applies if you take out more than 10% of your contract value in any given year. The fee decreases every year you own the annuity until it is eliminated, usually, after seven to 10 years.
Mortality and Expense (M&E) Charge
This charge covers the cost of death benefits or other income guarantees associated with your annuity contract. It usually ranges from 0.4% to 1.75% a year.
Underlying Investment Fees
Depending on your variable annuity contract and the funds you invest in, these fees can range from 0.25% to 3% a year.

Because annuities are insurance products, they may not produce returns as high as those generated by individual stocks and other investment vehicles. Acknowledging this opportunity cost is important and should be carefully considered when planning for retirement. To thoroughly assess your options, you should consult with a financial advisor. 

Frequently Asked Questions About GMWBs

What is the difference between a guaranteed minimum withdrawal benefit and a guaranteed minimum income benefit?

These are both optional income riders with different features. A GMWB protects your annuity’s highest value if the market drops, and it allows you to withdraw a certain amount of funds each year. A GMIB rider — when annuitized — guarantees you will continue to receive payments of at least a minimum value on schedule, regardless of market conditions. Fees are typically slightly higher for GMIBs than GMWBs.

What is an example of how a guaranteed minimum withdrawal benefit pays out?

Let’s say your $100,000 variable annuity drops in value to $75,000 due to a recession. If you have a 5% annual withdrawal guarantee in your GMWB rider, you can still withdraw up to 5% (or $5,000) per year until your original $100,000 investment is recovered.

Is your minimum withdrawal benefit based on your life expectancy?

The percentage you can withdraw generally depends on your age at the time you start withdrawals. The older you are when you activate the rider, the more money you can typically withdraw annually.

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Last Modified: August 10, 2023

8 Cited Research Articles

Annuity.org writers adhere to strict sourcing guidelines and use only credible sources of information, including authoritative financial publications, academic organizations, peer-reviewed journals, highly regarded nonprofit organizations, government reports, court records and interviews with qualified experts. You can read more about our commitment to accuracy, fairness and transparency in our editorial guidelines.

  1. National Association of Insurance Commissioners. (2023, January 29). Buyer’s Guide for Deferred Annuities: Variable. Retrieved from https://oci.wi.gov/Documents/Consumers/buyers_guide_deferred_annuities_variable.pdf
  2. Ontario Securities Commission. (2021, August 24). Guaranteed minimum withdrawal benefit (GMWB) products. Retrieved from https://www.getsmarteraboutmoney.ca/invest/investment-products/complex-investments/guaranteed-minimum-withdrawal-benefit-gmwb-products/
  3. Reish, F. (2020, January 14). SECURE Act and Guaranteed Income (Part 2). Retrieved from https://www.natlawreview.com/article/secure-act-and-guaranteed-income-part-2
  4. Rae, D. (2019, July 1). The Six Variable Annuity Fees You Need To Know About. Retrieved from https://www.forbes.com/sites/davidrae/2019/07/01/variable-annuity-fees/
  5. Society of Actuaries. (2018). Variable Annuity Guaranteed Living Benefits Utilization. Retrieved from https://www.soa.org/globalassets/assets/Files/resources/research-report/2018/variable-annuity-guaranteed-utilization.pdf
  6. Blanchett, D. (2012, Feb 1). The Expected Value of a Guaranteed Minimum Withdrawal Benefit (GMWB) Annuity Rider. Retrieved from https://www.semanticscholar.org/paper/The-Expected-Value-of-a-Guaranteed-Minimum-Benefit-Eickelberg/6868f405511a12110b16a447b08d16300c6a2fc8?p2df
  7. Teachers Insurance and Annuity Association of America. (2008, April). The 5% Guaranteed Minimum Withdrawal Benefit: Paying Something For Nothing? Retrieved from https://www.tiaa.org/public/institute/publication/2008/5-guaranteed-minimum-withdrawal-benefit
  8. Shah, P. & Bertsimas, D. (2010, September 29). An Analysis of the Guaranteed Withdrawal Benefits for Life Option. Retrieved from http://www.mit.edu/~dbertsim/papers/Finance/An%20Analysis%20of%20the%20Guaranteed%20Withdrawal%20Benefits%20for%20Life%20Option.pdf