A guaranteed minimum income benefit (GMIB) is an optional rider that can be included in an annuity contract to provide a minimum income amount to the annuity holder.
What are annuities? An annuity is an insurance product in which you pay a premium to the insurance company, then receive payments back at a later date. There are a number of different types of annuities, with different annuity rates.
A GMIB annuity can ensure that you receive a consistent stream of guaranteed income. If you’re considering buying an annuity for your retirement, it’s helpful to understand what guaranteed minimum income means, and how it works.
GMIBs, Defined
Annuities are one option you might consider when starting a retirement fund. But what are annuities and how do they work? It’s important to answer this question first when discussing guaranteed minimum income benefits.
An annuity is a type of insurance contract. You purchase the contract, typically with a lump sum, on the condition that the annuity company pays money back to you now or starting at a later date, e.g. in retirement.
Depending on how the annuity is structured, your money may be invested in underlying securities or not. Depending on the terms and the annuity rates involved, you may receive a lump sum or regular monthly payments. The amount of the payment is determined by the amount of your initial deposit or premium, and the terms of the annuity contract.
Now for the GMIB definition: A guaranteed minimum income benefit is a rider that the annuity holder can purchase, at an additional cost, and add it onto their annuity. The goal of a GMIB is to ensure that the annuitant will continue to receive payments from the contract — that’s the “guaranteed minimum income” part — without those payments being affected by market volatility.
A GMIB annuity is most often a variable annuity or indexed annuity product (though annuities for retirement can come in many different flavors). More on that below.
How GMIBs Work
Let’s look at two different types of annuities for retirement: variable and indexed.
• Variable annuities can offer a range of investment types, often in the form of mutual funds that hold a combination of stocks, bonds, and money market instruments.
• Indexed annuities offer returns that are indexed to an underlying benchmark, such as the S&P 500 index, Nasdaq, or Russell 2000. This is similar to other types of indexed investments.
With either one, the value of the annuity contract is determined by the performance of the underlying investments you choose.
When the market is strong, variable annuities or indexed annuities can deliver higher returns. When market volatility increases, however, that can reduce the value of your annuity. A GMIB annuity builds in some protection against market risk by specifying a guaranteed minimum income payment you’ll receive from the annuity, independent of the annuity’s underlying market-based performance.
Of course, what you can draw from an annuity to begin with will depend on how much you invest in the contract, stated annuity rates, and to some degree your investment performance. But having a GMIB rider on this type of retirement plan can help you to lock in a predetermined amount of future income.
Pros & Cons of GMIBs
Guaranteed minimum income benefit annuities can be appealing for investors who want to have a guaranteed income stream in retirement. Whether it makes sense to purchase one can depend on how much you have to invest, how much income you’re hoping to generate, your overall goals and risk tolerance. Weighing the pros and cons can help you to decide if a GMIB annuity is a good fit for your retirement planning strategy.
Pros of GMIBs
The main pro or benefit of a GMIB annuity is the ability to receive a guaranteed amount of income in retirement. This can make planning for retirement easier as you can estimate how much money you’re guaranteed to receive from the annuity, regardless of what happens in the market between now and the time you choose to retire.
If you’re concerned about your spouse or partner being on track for their own retirement, that income can also carry over to your spouse and help fund their retirement needs, if you should pass away first. You can structure the annuity to make payments to you beginning at a certain date, then continue those payments to your spouse for the remainder of their life. This can provide reassurance that your spouse won’t be left struggling financially after you’re gone.
Cons of GMIBs
The disadvantage of guaranteed minimum income benefit annuities is the cost. The more riders you add on to an annuity contract, the more this can increase the cost. So that’s something to factor in if you have a limited amount of money to invest in a variable or indexed annuity with a GMIB rider. Annuities may also come with other types of investment fees, so you may want to consult with a professional who can help you decipher the fine print.
It’s also important to consider the quality of the annuity company. An annuity is only as good as the company that issues the contract. If the company were to go out of business, your guaranteed income stream could dry up. For that reason, it’s important to review annuity ratings to get a sense of how financially stable a particular company is.
Examples of GMIB Annuities
Variable or indexed annuities that include a guaranteed minimum income benefit can be structured in different ways. For example, you may be offered the opportunity to purchase a variable annuity for $250,000. The annuity contract includes a GMIB order that guarantees you the greater of:
• The annuity’s actual value
• 6% interest compounded annually
• The highest value reached in the account historically
The annuity has a 10-year accumulation period in which your investments can earn interest and grow in value. This is followed by the draw period, in which you can begin taking money from the annuity.
Now, assume that at the beginning of the draw period the annuity’s actual value is $300,000. But if you were to calculate the annuitized value based on the 6% interest compounded annually, the annuity would be worth closer to $450,000. Since you have this built into the contract, you can opt to receive the higher amount thanks to the guaranteed minimum income benefit.
This example also illustrates why it’s important to be selective when choosing annuity contracts with a guaranteed minimum income benefit. The higher the guaranteed compounding benefit the better, as this can return more interest to you even if the annuity loses value because of shifting market conditions.
It’s also important to consider how long the interest will compound. Again, the more years interest can compound the better, in terms of how that might translate to the size of your guaranteed income payout later.
Investing for Retirement With SoFi
Making sure you’re on track to retire starts with considering your income needs and the different solutions that can help you to meet them. Annuities can help round out your financial strategy if you’re looking for ways to create guaranteed income in retirement.
Purchasing an annuity can be expensive, and adding on a guaranteed minimum income rider can add to the cost, but the security it provides may be worth it. The advantage of a GMIB annuity is that it offers some protection against market risk. No matter how the market performs, you’ll still be guaranteed a minimum amount of steady income.
With careful planning, a GMIB annuity can be combined with other savings vehicles. You can also save in a 401(k) at work or through an Individual Retirement Account (IRA), or potentially all three. Because annuities can be complex, and combining retirement accounts requires some care, you may want to consult with a professional.
If you’re ready to explore all your savings options, you can start investing for retirement with SoFi Invest® by opening an IRA today. Or you can set up an Active Invest account if you want to trade stocks, exchange-traded funds, or even crypto. And remember: SoFi members have access to complimentary financial guidance from professionals. Get started today!
FAQ
What are guaranteed benefits?
When discussing annuities for retirement, guaranteed benefits are amounts that you are guaranteed to receive. Depending on how the annuity contract is structured, you may receive guaranteed benefits as a lump sum payment or annuitized payments.
What is the guaranteed minimum withdrawal benefit?
The guaranteed minimum withdrawal benefit is the amount you’re guaranteed to be able to withdraw from an annuity once the accumulation period ends. This can be the annuity’s actual value, an amount that reflects interest compounded annually or the annuity contract’s highest historical value.
What are the two types of guaranteed living benefits?
There are actually more than two types of guaranteed living benefits. For example, your annuity contract might include a guaranteed minimum income benefit, guaranteed minimum accumulation benefit or guaranteed lifetime withdrawal benefit.
SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.
Photo credit: iStock/Luke Chan
SOIN0221018
