Kayaker, thanks for the link. It is an interesting way to look at the value of a variable annuity and I tend to share the author's skepticism. However, to be fair, what the author portrays is the worst case scenario for the value of the lifetime withdrawal benefit (i.e., that it only grows at the guaranteed rate).
However, if the non-worst case scenario actually unfolds, the value of the amount used to calculate the withdrawal rate could be higher than the guaranteed amount. This is because most plans are tied to the highest value achieved in the sub-accounts. They also have a ratchet mechanism such that even if the value in the sub-accounts decline in the future, the value of the guaranteed withdrawal base stays at the higher level - and then proceeds to grow from there at a rate at least what the guaranteed rate is.
To me, one of the biggest problems with annuities in general (not just variable annuities) is the effect of inflation. Sure, 5% for life seems like a reasonable return - especially if it is guaranteed. However, inflation can eat that up such that the buying power of that 5% erodes to next to nothing. Proponents of variable annuities will claim that if the underlying value of the sub-accounts rise during inflationary periods, the withdrawal amount has the potential to rise as well. In theory this is correct. However, in reality, once you start making withdrawals (which are also subtracted from the sub-account values), it takes a VERY large increase in the market to offset these withdrawals such that the value of the basis for withdrawal amount can rise - thus allowing for an increase in the annual withdrawal.
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