Penalties may include surrender charges as high as 9 percent of the account balance for cashing out, according to Morningstar. And taking out more money than is allowed in the terms of the rider may reduce the future guaranteed income, said Pfeifer, the actuary.
The usual withdrawal rate on contracts with a rider is 4 percent or 5 percent a year at age 65, according to Ernst & Young. That percentage generally increases if customers wait to start taking out money. Some contracts allow withdrawals of 7 percent at age 85, data from the New York-based firm shows.
Excess Withdrawals
The New York State Insurance Department said in February it will require insurers to disclose how withdrawals in excess of those set percentages affect future payments.
"Many insurers were providing a general disclosure about excess withdrawals," said James J. Wrynn, New York Insurance Superintendent. "That doesn't really have the same kind of impact as saying that your $100 monthly payment for life will be reduced to $50 per month for life if you take this excess withdrawal."
The riders may be worth it for the risk-averse investor who understands how the fees may affect their returns and as a partial allocation for an individual close to retirement without a long time for fluctuations in the market, said Masters of Pinnacle Financial Group.
Affording Retirement
More than a quarter of U.S. workers said they're "not at all confident" about their ability to afford a comfortable retirement, the highest percentage in two decades, according to a March report by the Washington-based Employee Benefit Research Institute. Men have a life expectancy of 17 years at age 65, based on government tables from the National Center for Health Statistics. For women it's 20 years.
Elinor and Robert Louis of California have about $1 million, or half their retirement savings, in variable annuities with a guarantee. "Without it, it's like Russian roulette," said Robert Louis, 62. "You don't know what's going to happen."
The extra fees for the rider are worth it because the product provides the potential for growth, downside protection and the ability to pass money to their heirs, said Elinor Louis, 62.
Annual charges for the riders that provide withdrawals for life range from 0.3 percent to 1.7 percent, Morningstar data show. The average "all-in" cost of a variable annuity with such a guarantee is 3.54 percent, according to Morningstar.
Insurers also may raise fees when they increase the benefit base amount used to calculate the annual withdrawal or income, said Glenn Daily, a fee-only insurance consultant in New York in an e-mail. It may be impossible for individuals to determine if they should accept a "step-up" that adds costs "without hiring a quant to figure it out," Daily said.