Annuities have a reputation problem, and a lot of it comes down to fees.
If you've ever sat through a pitch for one, you may have heard about "guaranteed income" and "tax-deferred growth" without a clear breakdown of what it actually costs you.
An annuity is a contract with an insurance company.
You hand over money, and in return you get either a stream of payments later or a lump sum down the road.
The insurance company has to make money somehow, and it does that through fees baked into the product.
The most common charge is a mortality and expense fee, often called an M&E fee.
This typically runs around 1% to 1.25% of your account value each year.
It covers the insurer's cost of guaranteeing your payments.
On a $100,000 account, that's $1,000 to $1,250 gone annually before anything else.
Then there are administrative fees, usually $25 to $50 a year or a small percentage.
Want a guaranteed lifetime income benefit?
Stack a few riders and you can easily hit 2% to 3% in total annual fees.
Variable annuities are the worst offenders.
They also charge fund expenses inside the subaccounts, often 0.5% to 1.5% on top of everything else.
Add it up and you could be paying 3% or more every year.
Over 20 years, that kind of fee load can eat a third or more of what you'd otherwise earn.
Fixed and immediate annuities are simpler.
You pay a lump sum, you get a set payout.
The "fee" is buried in the payout rate, so you don't see a line-item charge.
That's why comparing payout quotes from three or four different insurers matters so much.
A difference of a few tenths of a percent in payout rate adds up to thousands over a retirement.
Surrender charges deserve their own warning.
If you want out early, typically in the first five to seven years, you'll pay a percentage of your account value.
It often starts around 7% and steps down each year.
That lock-in is a feature for the insurer, not for you.
First, always ask for the full fee disclosure in writing before you sign anything.
If a salesperson won't put it on paper, walk away.
Second, ask yourself if you actually need the guarantees.
If you have a solid pension, Social Security, and a diversified portfolio, you may not need to pay 2% to 3% a year for income protection you already have.
Third, compare against plain alternatives.
A low-cost index fund plus a simple Treasury ladder can serve many retirees at a fraction of the cost.
The bottom line: annuities aren't scams, but they are expensive products sold by commission-driven agents.
Know what you're paying before you commit.
Final Thoughts
A few hours of homework now can save you tens of thousands later.