Annuities have a reputation problem, and it starts with the fine print.
The pitch sounds simple enough: hand over a lump sum, get a steady stream of income later.
What rarely makes the sales brochure is the stack of fees baked into the product, each one nibbling at the balance you were counting on for retirement.
The most common charge is the mortality and expense risk fee, often running between 1% and 1.5% of your account value every year.
It gets deducted annually, whether your investments gain or lose ground, and it funds the insurer's guarantee that you'll receive payments no matter how long you live.
Want a guaranteed income stream attached to a variable annuity?
That rider can tack on another 0.5% to 1.5% annually.
Add a death benefit or long-term care feature and the total can climb past 3% a year before you've paid a single fund manager.
On a $100,000 account, that's more than $3,000 vanishing annually.
Most contracts lock you in for five to seven years, with penalties that start around 7% and step down each year.
Withdraw too much too soon and you can lose a chunk of your own principal.
Many contracts also cap how much you can pull out annually, often 10%, without triggering the fee.
Indexed annuities add their own layer of confusion.
The insurer credits you based on an index like the S&P 500, but with caps, participation rates, and spreads that limit your upside.
A 10% index gain might translate to 4% or 5% credited to your account, while the fees still come out in full.
Ask for the fee table in writing before signing anything, and read the section on surrender charges carefully.
Compare the total annual cost against a low-cost index fund held in a regular brokerage or IRA account.
If the annuity's guarantees are the main draw, price out a simple term life policy plus a separate investment account, which often costs less.
Fixed annuities tend to be simpler, with fewer moving parts and clearer rates.
Variable and indexed products are where the fee stacking gets aggressive.
If a salesperson waves off your fee questions or promises "tax-free growth" without mentioning the trade-offs, that's your cue to walk.
One more thing worth checking: many employer-sponsored retirement plans already offer annuity options with lower institutional pricing.
Rolling a 401(k) into a retail annuity can mean paying more for the same guarantee, so compare both before you move a dollar.
For some retirees, the guaranteed income is worth the cost, especially if it helps them sleep at night.
Final Thoughts
But the fees are real, they compound against you, and they deserve the same scrutiny you'd give any other financial product.