But dumping this annuity would be a mistake. By Mary Beth Franklin, Senior Editor December 5, 2009 Our Reader Who: Gary Deer, 63 Where: San Antonio Question: Is my annuity too expensive to keep?Gary, a retired hospital administrator, invested $360,000 in a deferred variable annuity three years ago. The underlying investments -- chiefly stock mutual funds -- are now worth $317,000. But thanks to the annuity's built-in income and principal guarantees, Gary's account balance is $413,000 and growing. That's what counts because it's the basis for Gary's current monthly withdrawals of $600 as well as the lump sum that will eventually fund cash distributions and death benefits. Because he added some expensive protections to the annuity, his principal is guaranteed to grow by no less than 6% a year. If Gary continues to draw $600 a month and the principal grows by 6%, he'll have more than $800,000 in 15 years. Depending on his life expectancy and interest rates when (and if) he elects to convert the lump sum into permanent income payments, he will get a substantially higher draw even if the stock market collapses again. Sponsored Content But this assurance comes at a steep price. In exchange for the 6% floor and the right for his heirs to collect any undistributed principal when he dies, Gary is paying extra fees that bring his total costs to about 3% of the balance, which currently works out to about $12,000 a year. Half of that amount goes toward the principal guarantees and death benefits. Gary is wondering whether these options are still worth it, and if not, whether he should explore a tax-free exchange into another annuity with lower costs. Advertisement Verdict: Stay put. Financial advisers offer plenty of reasons for holding on. For one thing, says Mark Cortazzo, senior partner of Macro Consulting Group, in Parsippany, N.J., insurance companies have stopped offering such generous guarantees at any price and are charging high fees on inferior new annuity contracts. "Gary got a great deal that he can't buy today," says Cortazzo. Another plus is flexibility. Cortazzo says Gary's annuity does not restrict how he allocates his investments. So Cortazzo recommends that he concentrate his riskier choices, such as emerging-markets and commodities funds, inside the annuity and rebalance the rest of his portfolio into more-conservative holdings. Even if the riskier investments tank, he has that 6% guarantee. A third reason to leave well enough alone is the expense of dropping, or "surrendering," the annuity. Gary would have to cough up more than $20,000 in penalties because the surrender fees do not expire until 2013. Greg Womack, of Womack Advisers, in Edmond, Okla., agrees that Gary should hang on to his annuity and hope the underlying investments recover. But, he says, Gary should reevaluate it when the surrender period expires. "The fees are high, but they may be worth it to make sure there is some floor on a portion of his retirement income," says Womack. Gary could economize by retaining the principal protection but dropping the death benefit, which would eliminate $2,500 a year in fees. If he were to die before long, however, his heirs would be affected, so Gary should discuss such a move with his family ahead of time.