The Difference Between GLWBs and LIBRs

If you need a reliable source of income for retirement, annuities offer one of the safest, most efficient ways to create that income. However, because modern annuities include a myriad of customization options, navigating their features, such as income riders, can be daunting.  

In this article, we’ll examine two of the most popular methods for producing deferred income- Guaranteed Lifetime Withdrawal Benefit Riders (GLWBs) and Lifetime Income Benefit Riders (LIBRs). Each offers unique advantages, and the right choice will depend on your financial goals. We’ll break down these two approaches, explore their pros and cons, and give you the information you will need to determine which will work best for your retirement plan.

Guaranteed Lifetime Withdrawal Benefit Riders (GLWBs)

Typically attached to a fixed indexed annuity, a GLWB rider guarantees that you will be able to withdraw a specified percentage of your income value for as long as you live. This withdrawal is guaranteed regardless of market performance or your account balance. A GLWB rider is one way to create a predictable income stream that lasts throughout retirement.

How do GLWBs work?

When a GLWB is in the deferral phase—meaning you haven’t yet started withdrawing income—the income value grows at a guaranteed rate, often between four and eight percent. Once you begin withdrawals, your payout is fixed for life. However, the account value continues to earn interest based on market indexes, providing potential for additional growth.

One of the primary advantages of GLWBs is that they can give you higher deferred income payments compared to other annuity options, especially if you defer income for more than a year. However, the potential for higher income comes with some trade-offs. Although the annuity holder is guaranteed lifetime income, the cash value of the contract may decline quickly once withdrawals begin. In some cases, after a decade or so of withdrawals, there is little to no cash value remaining.

For retirees who want their annuities to create maximum income, the GLWB is often the clear choice. A GLWB can provide high payouts and is suitable for those who are primarily concerned with income rather than leaving a large financial legacy.

Pros of GLWBs:

  • Guaranteed lifetime income regardless of market fluctuations.
  • Higher deferred income payments compared to many other options.
  • The option to earn additional interest based on market performance.

Cons of GLWBs:

  • Cash value may deplete quickly, leaving little to no remaining value for beneficiaries.
  • Fees associated with the rider can reduce overall returns.
  • Income payments cease upon death unless you build a residual account value into the plan.

Lifetime Income Benefit Riders (LIBRs)

A Lifetime Income Benefit Rider (LIBR) works similarly to a GLWB in that it guarantees lifetime income. However, there is a notable difference in the income calculation. With a LIBR, the income percentage is determined based on an annuitant’s life expectancy at the time withdrawals begin. Calculating in this manner results in a predictable level of income that neither increases nor decreases over time.

LIBRs are popular for retirees looking for stable, guaranteed income throughout retirement, but they come with certain limitations. Because the income is fixed, inflation can erode the purchasing power of those payments over time. This is especially problematic for retirees who might spend as many years in retirement as they did in their working careers.

To address the inflation issue, some Fixed-Indexed Annuities (FIAs) with LIBRs allow the contract value to continue growing based on market indexes, even during income withdrawals. This feature can help mitigate inflation risk by providing potential for growth, though this feature often comes with additional fees.

Pros of LIBRs:

  • An LIBR guarantees lifetime income, providing you with financial security.
  • You have predictable payouts based on life expectancy with an LIBR.
  • Some LIBR contracts allow for additional growth based on market performance. This feature gives you a hedge against inflation.

Cons of LIBRs:

  • With an LIBR, your fixed income may not keep up with inflation, reducing purchasing power over time.
  • You have limited flexibility in terms of leaving a legacy since the contract only pays out for the life of the annuitant.
  • An LIBR may include fees that can erode the overall value of the contract.

Choosing Between GLWBs and LIBRs

If you are trying to decide between a GLWB and a LIBR, you should first consider your money goals. If you want to create more retirement income, a GLWB might be the better choice due to its higher payout potential. However, the rapid depletion of cash value and limited ability to leave a financial legacy may be drawbacks for some.

If you want to leave money to your beneficiaries, a LIBR could be a better fit. LIBR income may be slightly lower, but you have the potential for more growth. A LIBR also has a level of built-in stability for retirees who want to ensure some financial security for their beneficiaries.

Summing it up:

GLWBs and LIBRs are riders that have valuable features to enhance your retirement income plan. Choosing over the other should be based on what you want your money to do.  Are you looking for the highest income potential, or are you more concerned about leaving a legacy for your loved ones?

If you are unsure, it’s wise to seek advice from a safe money professional trained in the many nuances of annuities and annuity riders. Your advisor will ask the questions and gather the information needed to help clarify your long-term money goals, risk tolerance, and desire for a legacy. 

If you would like to speak with one of our Approved Guaranteed Income Advisors, please contact us here:  https://safemoneyinnovators.com/contact-us/