Maximizing Income Now: A 71-Year-Old Fixed Annuity Audit
Michael came to us at 71 with a fixed deferred annuity he had funded in his early sixties and then largely forgotten about. He had been living on Social Security and pulling small amounts from a brokerage account, but the brokerage account was starting to feel like it would run dry sooner than he wanted. The question he brought to the audit was simple: how much income can I actually get out of this thing, right now?
The audit found that by exchanging his existing fixed annuity into a Single Premium Immediate Annuity (SPIA), Michael could pull $22,140 per year in guaranteed lifetime income from the same pool of money – more than four times what his current contract was generating in free withdrawals.
- Client
- Michael, age 71
- Contract Type
- Nonqualified Fixed Deferred Annuity
- Account Value
- $248,500
- Years Held
- 10 years (out of surrender)
- Current Crediting Rate
- 2.10% renewal
- Currently Taking Income?
- Free withdrawals only (about $5,200/yr)
Original Goal vs. Goal Today
Michael bought the contract during the post-2008 rate environment because it offered a guaranteed minimum and downside protection. At 61, he didn’t need income. He needed a safe place to park money that would do better than a bank CD while he kept working part-time.
At 71, he is done working. Social Security covers his housing. The brokerage account that was supposed to bridge the gap to higher Social Security at 70 (which he already claimed) is now his only flexible source of cash. The annuity has been sitting there compounding at a sleepy 2.10% renewal rate while he tried not to touch it. That made sense at 61. It does not make sense at 71.
What His Contract Actually Looks Like
| Annuity Type | Nonqualified Fixed Deferred Annuity |
|---|---|
| Issue Date | 10 years ago |
| Surrender Period | Completed – no surrender charge |
| Current Account Value | $248,500 |
| Original Premium | $200,000 |
| Current Renewal Crediting Rate | 2.10% |
| Annual Free Withdrawal Allowed | 10% (~$24,850), tax on gain first |
| Free Withdrawals Michael Has Actually Taken | About $5,200/yr – he’s been afraid to drain it |
This is the classic “stuck in a renewal rate” problem. The carrier honored its original 5-year guarantee, then dropped the renewal rate every year afterward. At 2.10%, Michael’s money is barely keeping up with inflation, and he is not actually drawing the income he needs.
Three Paths Forward
The audit modeled three options on the same $248,500. The objective was simple: convert the largest possible portion of this account into reliable monthly income for the rest of Michael’s life.
Annual income side-by-side
Why the SPIA Won This Audit
At 71, Michael’s mortality credits are starting to matter. SPIAs price lifetime income using actuarial tables, and the older the annuitant, the larger the share of each payment that can come from the pool rather than from interest alone. A 71-year-old male buying a life-only SPIA today gets a payout rate near 8.5% of premium. A 65-year-old gets closer to 7%. A 75-year-old gets close to 10%.
Michael’s situation also matched the SPIA’s biggest weakness: liquidity. He doesn’t have flexibility concerns. He has Social Security, no debt, and a small emergency fund in his brokerage account. He doesn’t need access to the $248,500 in an emergency. He needs the largest possible monthly check it can produce. That is exactly what SPIAs do best.
The Life with Cash Refund structure was important to him. If he passed away early, his daughter would receive the unused portion of his premium – so the $248,500 wasn’t being “given to the insurance company.” Pure life-only SPIA payouts would have been about 6% higher, but Michael chose the modest income reduction in exchange for the death benefit guarantee.
The Tax Story
Because Michael’s annuity was nonqualified (funded with after-tax dollars), the SPIA payouts use an exclusion ratio. The IRS treats a portion of every payment as a tax-free return of his original $200,000 premium, and only the remainder is taxed as ordinary income. For Michael, roughly 60% of each year’s $22,140 payment is tax-free.
By contrast, his current free withdrawals are LIFO-taxed – every dollar he pulls out is treated as fully taxable gain until the entire $48,500 in accumulated interest is exhausted. The 1035 exchange preserved his $200,000 cost basis intact, which is why the exclusion ratio came out so favorably.
What the audit revealed
Michael was not “stuck” with $5,200 a year. He was stuck with a contract designed for the saver he was at 61, not the retiree he is at 71. The same pool of money, run through the right product, was capable of producing more than four times the annual income – guaranteed for life, with a death benefit guarantee, and roughly 60% of each payment tax-free.
The right answer was not “buy a new annuity.” It was “convert this annuity into the job it should be doing now.”
What This Means If You Have a Similar Contract
Fixed deferred annuities that have been sitting in renewal mode for 5+ years are one of the highest-leverage opportunities an audit can find. Three things tend to be true:
- The renewal crediting rate is well below current market rates. Today’s top MYGA rates are 5%+ for 5-year terms. Renewal rates on older fixed annuities are often 2-3%.
- You’re out of the surrender period or close to it, so moving funds via 1035 carries no penalty.
- Your need has shifted from accumulation to income. A SPIA, DIA, or FIA with income rider can convert the same dollars into substantially more guaranteed payouts than free withdrawals ever will.
That is exactly what the audit is designed to surface. We compare what your existing contract is actually delivering today against what the current market would do with the same money, then hand you the report. Request your free audit here.
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Request my free auditAbout this case study. The client featured here is anonymized — name changed and some details adjusted for privacy. Account values, fee percentages, and income figures reflect actual audit outcomes for clients with similar contracts. Individual results will vary depending on contract specifics, carrier, current market rates, and client goals.
Before considering exchanging one annuity contract for another, all aspects of the exchange should be considered, including but not limited to cost, guaranteed interest rates, surrender charges, rider costs, possible rating changes, and different features and benefits of the two contracts. A 1035 exchange must be carefully evaluated for tax and contractual implications. Annuities are long-term investments designed for retirement planning. Withdrawals prior to age 59½ may result in a 10 percent federal tax penalty, in addition to any ordinary income tax. The guarantee of the annuity is backed by the claims-paying ability of the issuing insurance company.
Variable annuities are securities under federal law and may be considered securities under state law. If a variable or registered annuity is part of an audit, securities-related services are provided through First Palladium, LLC, Member FINRA. Past audit outcomes are not a guarantee of future results.
