Annuities have become a $4 trillion market, and the pitch is simple: hand over a lump sum, get a guaranteed paycheck for life.
What the brochures often skip is how much of that money never makes it into your account.
Fees can run from under 1% to more than 3% a year, and on a $250,000 contract, that gap can mean tens of thousands of dollars over a retirement.
The problem is that annuity costs rarely show up as one clean line item.
They arrive in layers, and each layer takes a bite before your balance ever grows.
Start with mortality and expense charges, usually 1% to 1.5% annually.
That covers the insurer's administrative costs and the guarantee itself.
Then there's the fund expense ratio inside variable annuities, which can add another 0.5% to 1.5% depending on what the money is invested in.
A basic variable annuity can easily total 2.5% a year once everything is stacked.
Add a death benefit or long-term care rider and you can push total annual charges past 3%, even approaching 4% in some contracts.
The insurer isn't hiding these numbers, but they're buried in a prospectus most buyers never finish reading.
Most contracts lock you in for five to seven years, sometimes longer, with penalties that start around 7% and step down each year.
Withdraw too much too soon and you can lose a chunk of your principal on top of the ongoing fees.
Many contracts also cap annual withdrawals at 10% without a penalty, so even getting your own money back takes planning.
Compare that to a plain index fund, where expense ratios often sit under 0.10%.
On a $250,000 balance, the difference between 0.10% and 2.5% is roughly $6,000 a year, money that compounds against you for decades.
A fixed annuity or a low-cost immediate annuity can make sense for someone who genuinely needs lifetime income and has already maxed out other retirement accounts.
The math works better when the contract is simple, the fees are disclosed upfront, and you plan to hold it long enough to outlast the surrender period.
Before signing anything, ask for the total annual cost in dollars, not percentages.
Request a list of every fee, including riders you didn't ask for.
Check the surrender schedule and the free withdrawal limit.
And if a commission-based salesperson is pushing a complex product with a long lockup, get a second opinion from a fee-only fiduciary who has no incentive to sell you anything.
The SEC's Regulation Best Interest requires brokers to act in your best interest, and several states now push stricter annuity sales rules.
That helps, but it doesn't replace doing your own math.
The takeaway: an annuity's guarantee is only as good as what's left after fees.
Run the numbers in dollars, read the surrender schedule, and treat any product you can't fully explain as one to walk away from.
Final Thoughts
A guaranteed paycheck is worth a lot less if the fee structure quietly shrinks it every year.