With interest rates still elevated compared to the past decade, sales of these insurance products hit record levels in recent years, and plenty of retirees are being pitched hard on the promise of guaranteed lifetime income.
What often goes unmentioned in those sales conversations is the layered fee structure buried in the fine print — costs that can quietly shave thousands of dollars off a nest egg over time.
Unlike a simple index fund with a single expense ratio, annuities can stack multiple charges.
There's the mortality and expense risk fee, administrative fees, and often a rider fee if you add a guaranteed income or death benefit.
On top of that, many products pay a commission to the agent who sold them — frequently 5% to 7% upfront on indexed and variable annuities — a cost that's baked in rather than billed separately.
A plain fixed annuity is usually the cheapest, sometimes with no explicit annual fee at all.
Variable annuities, which tie your money to market subaccounts, tend to be the most expensive, with total annual costs that can land between 2% and 3.5% once you add living-benefit riders.
Indexed annuities sit somewhere in the middle, and their complexity makes it genuinely hard for a buyer to calculate what they're paying.
Why should this worry anyone nearing retirement?
Run the math on a $200,000 account with a 2.5% annual drag.
That's $5,000 gone in year one — before the market does anything.
Over a 20-year retirement, the compounding you lose to fees can easily exceed six figures.
A surrender charge can make it worse: exit too early and you may owe 7% or more of your account value just to get your money back.
There's a catch that trips up a lot of buyers, too.
The "guaranteed" income figure a salesperson quotes is often calculated on a separate income base, not your actual account value.
That means the headline number can look generous even as fees chip away at the balance you could otherwise leave to heirs.
It's not necessarily a scam — it's just a product where the economics favor the issuer and the seller.
If you're considering one, ask for the fee table in writing and demand a plain-English total annual cost.
Compare that number against a low-cost alternative like a Treasury ladder or a simple index fund paired with a spending plan.
And remember the free-look period, typically 10 to 30 days depending on your state, which lets you cancel without penalty if the numbers don't add up.
None of this means annuities are automatically a bad call.
For some people, the certainty of a paycheck that never runs out is worth paying for, especially if it keeps them from panic-selling in a downturn.
The problem is buying one without knowing the price.
Final Thoughts
In a market full of smooth pitches, the fee table is the one document that tells you what you're really signing up for — read it before you sign, not after.