What To Do With An Old Variable Annuity
I ran some case studies similar to this when I first started the podcast, but with solid market performance over the past several years we are seeing it more often. Having a variable annuity specialist on hand gives me another reason to dig into it. Nate spent many years as a wholesaler for variable annuities so he knows the market really well. We’ve had several people in the last few months call in with questions about a variable annuity they have. Should it be replaced? Should they keep it? Should they do something else? Can it help in some other way with retirement?
We’re going to share the case of one couple who is currently in this position — but first, let me give you some context.
Variable Annuities: Complex, But Not Always Bad
Variable annuities are the most complex insurance products on the market. All contracts can be issued in simple form as little more than a tax shelter, but additional guarantees can be added. That’s what makes them complicated, and each additional component comes with its own cost/benefit analysis. This is where the fees stack up and that provides a lot of ammunition for those who want to criticize annuities.
We like variable annuities in their most basic form, but it’s still only applicable for certain people. When it comes to the guarantees, you can do much better elsewhere — and that’s exactly what we’re going to talk about.
In spite of high fees in most cases, variable annuities have done very well because the stock market has been on a hell of a roll for the past several decades. The guarantees on variable annuities are put in place so that you get something from the contract if the market doesn’t perform well — in most cases that’s guaranteed income or a death benefit of some sort. When the market does well, it turns out you can often take the money elsewhere for more benefit. Over the past 20 years both Nate and I have seen a lot of variable annuities that have performed well. It presents an opportunity to change things up.
Whether you swap out a current contract will depend entirely on your specific goals. Let me walk you through some of the things we’ve seen before we get to the current case.
Cases We’ve Seen Before
The income rider that wasn’t the best option
If you’re planning to take income from the contract, there are a couple of different options. I remember one couple who had a variable annuity with an income rider that would pay $20,000 in lifetime income. But the annuity option on the contract would give them a 50% increase in the income payout. Simply knowing how these contracts work made a big difference for that couple — and their current agent wasn’t telling them about it.
The older couple who already had it figured out
Another case I had was an older couple in their early 80s who had been taking a solid income payout. Because of good market performance the account value had held up and they still had the initial premium in the account balance. It would have provided the opportunity to replace it if a higher income payment was available elsewhere. Although others had tried to sell them a new annuity, it didn’t make sense — they already had something working well. My advice was to leave it alone and keep collecting income payments.
The most common scenario: accumulated growth, time to protect it
Most of the other people I’ve seen bought a variable annuity long ago and let it accumulate a substantial amount. At some point most of them consider protecting the larger cash balance by moving to a MYGA or fixed indexed annuity. You reduce the fees, guarantee the principal, and eliminate the market risk. When you get old enough, the risk simply isn’t worth the payout.
The Current Case
This one is a bit different from most of what we typically see. This couple is a few years away from 60, so it’s a good time to start making some retirement moves. They bought a variable annuity about 10 years ago for $750,000 and it has done well — as it should have. It was a simple contract built for growth and efficiency, so it doesn’t have any additional guarantees. Here’s where they stand today:
| Detail | Numbers |
|---|---|
| Original Premium | $750,000 |
| Current Cash Value | ~$1,250,000 |
| Total Gain | ~$500,000 |
| Total Portfolio | ~$5,000,000 |
| Annuity as % of Portfolio | ~20-25% |
| Contract Type | Non-Qualified |
| Income Rider | None — base contract only |
| Target Income Start | Age 60 (~3 years away) |
The Tax Issue You Can’t Ignore
The moment you look at a non-qualified variable annuity with $500,000 in gains, taxes become the first conversation. If this were an IRA they’d have more options — they could roll it to any other IRA, put it back into managed money, whatever makes sense. But because it’s non-qualified, if they take it out of the annuity there will be a big tax bill on that entire gain.
That’s not necessarily a bad thing — it can likely be used to augment their retirement in some way. But it does mean they’d be well-advised to keep the money in some sort of annuity through a 1035 exchange, which allows you to move from one non-qualified annuity to another without triggering a taxable event.
What Guaranteed Income Looks Like
They came to the website, ran a quote on their own, and found top-of-the-market rates — so the calculator did its job. They’re interested in guaranteed lifetime income and looking to start in about three years.
If they take the current variable annuity — which has no income guarantee — and move it into one of the contracts they found, here’s what it looks like:
| Scenario | Details |
|---|---|
| Premium | $1,250,000 |
| Income Start | Age 60 (3 years) |
| Payment Type | Joint Life |
| Annual Guaranteed Income | ~$99,616/year |
| Top Product | American General Power Select Plus |
| Runner-Up (A+ rated) | North American |
Nearly $100,000 a year. Guaranteed. For both of their lifetimes. If one of them lives to age 90, they’d collect nearly $3 million in total guaranteed income payments. Standing alone that creates a solid internal rate of return — but we can also look at how it affects the total portfolio.
Does It Help or Hurt the Overall Plan?
This is the question that matters most. We want to verify that making this move actually benefits their overall plan — not just the annuity piece. Using $100,000 as the income goal and running it through the portfolio calculator, here’s what the numbers show:
| Scenario | Without Income Annuity | With Income Annuity | Difference |
|---|---|---|---|
| Worst 20-Year Market Period | ~$7.1 Million | ~$8.0 Million | +$800,000 |
| Last 20-Year Market Period | Less than $12 Million | ~$12 Million | +$800,000 |
More money in both scenarios. Plus nearly $100,000 a year in guaranteed income on top of that.
The reason comes down to sequence of returns risk. When you’re drawing income from a portfolio without a guaranteed source, you’re selling assets — sometimes at a loss — to fund your lifestyle. When the market drops and you’re still pulling money out, you lock in losses and miss the recovery. That’s what quietly destroys long-term portfolio performance.
The annuity eliminates that problem. It covers the income need so the rest of the portfolio stays invested and recovers naturally.
So What Should You Do With Your Old Variable Annuity?
Here’s how to think through it:
Keep it as-is if:
- It’s performing well, fees are low, and it’s doing its job
- You don’t need income yet and have no clearly better alternative
- It’s inside an IRA and you have full flexibility to evaluate later
Consider a 1035 exchange into a guaranteed income annuity if:
- It’s non-qualified with significant gains and you want to avoid a large tax bill
- You’re within a few years of needing income
- The current contract has no income rider — or the rider payout is less than what a new contract offers
- You’re ready to reduce market risk heading into retirement
Consider annuitizing only if:
- The annuitization payout is significantly better than any other option (we’ve seen cases where it beats an income rider by 50%)
- You fully understand you’re permanently handing the asset over to the insurance company
Leave it alone if:
- Someone is just trying to sell you something new without a clear, quantifiable reason to move
The Bottom Line
Variable annuities aren’t inherently good or bad. What matters is whether yours still fits your situation — and whether there’s a better way to make it work for you in retirement. If you’ve got an old variable annuity and you’re not sure what to do with it, start by running your numbers on the FIA Income Quote Calculator. Then schedule a call and we’ll walk through it together.
We’re not here to sell you something. We’re here to help you figure out what actually makes sense.
Bryan Anderson
Watch Episode 220: What To Do With an Old Variable Annuity
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Last Updated on March 27, 2026 by Bryan Anderson
