Variable Annuities and the Riders: When the Math Actually Works

Variable annuities used to be everywhere. Peak VA sales in 2007 hit roughly $145 billion industry-wide. By 2024 the number was around $61 billion — less than half. The decline isn't because retirees stopped wanting tax-deferred growth. It's because the all-in cost of variable annuities, especially with riders, made the math hard to defend in most situations. Fixed-indexed annuities and the newer registered index-linked annuities (RILAs) ate most of the market share. So why am I writing an article about VAs at all? Because the product still exists, the products have gotten better, and there are specific cases where a VA actually earns its place. Let me walk through the honest version, right?

What a VA actually is

A variable annuity is essentially a tax-deferred wrapper around mutual fund subaccounts, plus optional insurance-guarantee riders layered on top. You pick from a menu of subaccounts (similar to mutual funds), the subaccounts go up and down with the market, and your account value moves accordingly. Unlike fixed-indexed annuities, your principal is not protected from market loss — at least not on the base contract.

The "guarantees" come from optional riders. Common ones:

• Guaranteed Minimum Withdrawal Benefit (GMWB) — pays a minimum percentage (often 4-5%) of an "income base" annually for life, regardless of account performance. The income base may roll up over time even if the account value drops.
• Guaranteed Minimum Income Benefit (GMIB) — guarantees a minimum annuitization income at a future date, even if the account has lost value.
• Enhanced Death Benefit (EDB) — guarantees the beneficiary a minimum death benefit, often based on highest-anniversary or roll-up methodology.

Each rider adds a fee. Stack them and you can be paying 2.5% to 3.9% per year all-in on a VA — which is why the math is hard.

The fee picture in plain English

That total fee load is the source of the conventional advice: avoid VAs. A 2.5%-plus annual fee drag, compounded over decades, requires the underlying investments to do meaningful extra work just to break even with a less-expensive structure. For most retirees, the math doesn't pencil.

The newer wave: lower-cost VAs

One reason the conventional advice is becoming dated is that low-cost VAs have entered the market. Some carriers now offer:

• "Investment-only" VAs (IOVAs): M&E charges of 0.20-0.40%, subaccount expense ratios in the 0.10-0.40% range, no riders. Total cost: 0.5-0.8%. These are tax-deferred wrappers around index funds, basically.
• Lower-cost rider versions: Some "B-share" or fee-only-advisor-distributed VAs offer GMWB or other riders at 0.7-1.0% instead of the legacy 1.2-1.5%.

The lower-cost wave is genuinely changing the math. A 0.6%-all-in VA wrapping low-cost index funds can be a reasonable tax-deferral vehicle for non-IRA dollars in higher tax brackets. The product is no longer the mid-2000s nightmare for everyone.

When a VA actually fits

The narrow cases where a VA earns its place in a 2026 retirement plan:

• You're in a high tax bracket and have already maxed every other tax-advantaged account. Your IRA is funded, your 401(k) is funded, you have HSA contributions if eligible, and you still have non-IRA money that you'd like growing tax-deferred. A low-cost IOVA can extend your tax-deferred capacity. The math works best in higher brackets.
• You have a specific guaranteed-income need that can't be met by Social Security and pensions. A VA with a GMWB rider — purchased at the right age, from the right carrier, at the lower-cost end of the rider spectrum — can produce reliable lifetime income. Whether it's better than a SPIA or an FIA-with-rider depends on the specifics. Run the comparison.
• You want market participation with a death-benefit floor. An enhanced death benefit can provide a meaningful legacy guarantee for a beneficiary, even if the account underperforms. Fee-justifiable in some specific estate situations.
• You inherited an existing VA with a meaningful "high water mark" income or death benefit base. Don't surrender it without doing the math — sometimes the existing benefit is worth more than the surrender value would suggest.

The cases where a VA does not fit:

• You're in a moderate or low tax bracket. The tax-deferral benefit shrinks. Other vehicles dominate.
• You're using IRA money. The IRA is already tax-deferred. A VA wrapper inside an IRA adds cost without adding tax benefit. Almost always wrong.
• You haven't maxed your IRA, 401(k), or HSA. Use those first. They're cheaper and as tax-advantaged.
• You want low cost and simplicity. A diversified mutual fund or ETF in a regular brokerage account with tax-loss harvesting will usually outperform a VA wrapper after fees.

The 1035 exchange option

If you currently own an old VA with high fees and you've decided you no longer want it, you have one important tool: the 1035 exchange. Section 1035 of the Internal Revenue Code allows you to transfer one annuity contract into another without triggering tax on the embedded gain. So if you have a $300,000 VA with high fees, you can 1035-exchange it into a low-cost IOVA, an FIA, a MYGA, or a SPIA — without owing tax on the transfer.

What 1035 does NOT do: avoid surrender charges on the contract you're leaving. If you're still in the surrender period of your existing VA, the surrender charge applies on the way out even with a 1035. Time the exchange to minimize that hit, or wait until the surrender period ends if the math supports it.

1035 is one of the more useful "fix what I bought five years ago" tools available. Most retirees who bought expensive VAs in the 2010s have meaningful 1035 options today.

What this looks like in practice

The conventional advice "avoid variable annuities" was correct for the 2005-2015 era of high-fee, rider-heavy VAs sold by aggressive agents. The 2026 picture is more nuanced. Low-cost IOVAs are reasonable tax-deferral vehicles for high-bracket investors who've maxed other accounts. Newer GMWB structures are sometimes competitive with FIA income riders. And 1035 exchanges give you an off-ramp from older expensive contracts without triggering tax.

The right move is the same as with any annuity: start with what you actually need, run the comparison across product types, and pick the lowest-cost tool that solves the specific problem. Tools, not religions. Right tool for the right job. We do this comparison as part of a written-plan consultation. Sleep at night, knowing the products in your retirement plan are doing actual work for you.

The bottom line

Variable annuity sales collapsed since 2007 because of fees. The legacy VA with stacked riders and 3%+ all-in cost is hard to defend in most retirement situations. Modern low-cost VAs and IOVAs have changed the math for high-bracket investors who've maxed other tax-advantaged accounts. 1035 exchanges provide an off-ramp from older expensive contracts. The honest 2026 conclusion: most retirees don't need a VA, but the cases where one fits are real and worth running the math on. Tools, not religions.