If you have ever sat through a pitch for an annuity, you probably heard about guaranteed income and peace of mind.
What you may not have heard is how much of your money goes to fees before a single check lands in your account.
Those costs rarely show up as one clean line item.
Most annuities charge an annual fee based on your account value, often called a mortality and expense charge.
That number might look small at 1.25 percent, but on a $200,000 balance it works out to about $2,500 a year.
Add fund management fees inside the contract, and you are often paying 2 to 3 percent annually.
On the same balance, that is $4,000 to $6,000 gone every year, whether the market is up or down.
A guaranteed income rider or long-term care rider sounds like a safety net, but each one carries its own yearly charge.
Stack two or three and you can push total costs past 3.5 percent.
A surrender period can lock you in for seven years or longer, and leaving early triggers a fee that starts around 7 percent and steps down slowly.
If the market gains 15 percent, your crediting method might hand you 6 percent, with the rest kept by the insurer.
So you carry the downside risk of fees while giving up part of the upside.
That tradeoff is not automatically bad, but it should be a conscious choice, not a surprise buried in a 60-page prospectus.
Fixed annuities and multi-year guaranteed annuities tend to be simpler, with fewer moving parts and lower costs.
Variable annuities are the fee-heavy end of the spectrum.
Indexed annuities sit somewhere in the middle, and their complexity makes it hard to compare one offer to another.
If a salesperson cannot explain every fee in plain language on one page, that is your signal to slow down.
Before you sign anything, ask for the fee table in writing.
Request the total annual cost in dollars, not percentages, based on your actual deposit.
Ask how long the surrender period runs and what the exit fee is in year one, year three, and year seven.
Ask whether the income rider fee continues even after you start taking payments.
A straight answer should take minutes, not a follow-up appointment.
You can also compare a low-cost alternative.
A simple mix of index funds plus a delayed Social Security claim gives many retirees more guaranteed lifetime income per dollar than a fee-loaded annuity.
That is not true for everyone, and some people genuinely value the insurance-like protection.
The point is to run the numbers side by side instead of accepting the first illustration handed to you.
Annuities are not scams, but the fee structure rewards the seller more than it rewards you in many cases.
Treat the fee table as the real product, because over 20 or 30 years those percentages decide how much income you actually keep.
Final Thoughts
Read it before you sign, and walk away if the math does not add up.