Wednesday, October 31, 2012

Selling and then Repurchasing a GLWB guarantee

I received this question via email:

It seems to me logical to sell my GLWB when I reach 65 or any other age where the rate they guarantee goes up from 4.5% to 5% in the case of the Vanguard GLWB.  Then buy back in at age 65 a few days later or whatever waiting period they may require to get the 5%.   It seems common sense, but maybe you know something the rest of us should know.  I am interested in you opinion. 

I provided the following answer, which I thought I would share here. As I've not personally read the prospectus for Vanguard's GLWB, it is always possible that one of my astute readers may be able to expand upon my answer:

What you are suggesting sounds reasonable as long as the GLWB is not "deep in the money."

I mean, you should benefit from this plan as long as:

new withdrawal rate  x  remaining contract value  >  old withdrawal
rate  x  old guaranteed benefit base

Before doing it, I would suggest that you read the prospectus carefully to make sure that there is no fine print designed to prevent doing it. I'm not sure. Also, with Vanguard I think there are no surrender charges, but surrender charges could disrupt this strategy for other companies. This again gets back to reading the prospectus carefully first.

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