Around the world, benefits from traditional pay-as-you-go pension systems decline and workers are increasingly asked to provide for their retirement through funded private pension arrangements. Financially inexperienced individuals may fare poorly in such self-directed private retirement accounts if they cannot understand risks associated with investments and payout options. On approach to overcome such problems might be to include income or rate of return guaranteesin private retirement plans. In the US, Variable Annuities with Guaranteed Minimum Withdrawal Benefits (VA-GMWBs) have been the most popular innovation in the retirement finance industry over the last decade.

VA-GMWBs are special deferred annuity contracts, which provide an investment component in terms of mutual fund-style sub-accounts during the accumulation phase and an insurance component in terms of the possibility to convert accumulated assets into a livelong income stream in retirement. The GMWB-feature allows policyholders to withdraw the entire initial investment within a certain time period, regardless of the performance of the underlying assets. At retirement, the remaining capital can either be converted into a lifelong annuity or be paid to the policyholder through periodic withdrawals. VA-GMWB contracts combine the possibility of equity ownership, downside protection against market risk, and the possibility of hedging longevity risk through annuitization. Due to the withdrawal option, premiums are at least in part refundable, which may help to overcome the reluctance of many households to voluntary annuitize their wealth.

This paper studies the impact of having access to VA-GMWBs on household consumption, portfolio choice, and wellbeing within a dynamic lifecycle framework. We derive optimal state-dependent VA-GMWB purchase and withdrawal policies and show that access to VA-GMWBs boosts consumption opportunities over the whole lifecycle, particularly for the old.