Annuities get pitched as a simple way to turn savings into guaranteed monthly income for life.
What the brochures tend to skip is how many layers of fees sit between your money and your payout.
Add them up and you can be handing over 2% to 3% of your balance every single year.
That matters more now than it did a few years ago.
When safe bonds paid next to nothing, a 2.5% fee was easy to ignore.
With high-yield savings and Treasuries paying real yields again, every basis point pulled out of your account is a basis point you can't earn back later.
The first fee is usually the surrender charge.
If you put money in and change your mind in year one, you might owe 7% to 10% to walk away.
That penalty typically shrinks by a point a year until it disappears, often after seven years.
Insurance agents earn their commission up front, and the surrender schedule is what protects the insurer if you bail early.
Mortality and expense fees, often called M&E, usually run 1% to 1.5% a year and pay for the insurance guarantee.
Administrative fees add a small slice, frequently $25 to $50 annually or 0.1% to 0.15%.
If your annuity is wrapped in a mutual fund lineup, those funds charge their own expense ratios, which can push the total past 2%.
Optional riders for a death benefit or long-term care coverage stack on another 0.5% to 1.5%.
Variable annuities with living benefit riders are the worst offenders.
A 2019 study in the Journal of Financial Planning found that the average variable annuity with a guaranteed income rider cost about 3.3% a year once you added everything up.
On a $200,000 account, that's roughly $6,600 gone annually before the market does anything.
Fixed indexed annuities hide the cost differently.
There's no explicit fee line, but caps and participation rates do the work.
If the S&P 500 gains 20% and your contract caps you at 6%, the insurer kept the difference.
That gap is the fee you never see on a statement.
Start by asking for the fee table, not the glossy illustration.
Every contract has one, and it lists M&E, admin, rider, and fund charges in writing.
Ask specifically what the surrender schedule looks like year by year and what the total annual cost is on the amount you're actually investing.
A plain vanilla SPIA, which is a single-premium immediate annuity with no riders and no investment menu, often carries internal costs around 1% or less.
A low-cost index fund plus a Treasury ladder won't guarantee income for life, but it also won't skim 3% annually.
If your employer offers a 401(k) match, that's almost always the better first move.
Max it out before considering any annuity.
And if a commission-based product is being pitched hard at a seminar with a free dinner, slow down.
The person across the table usually gets paid 5% to 7% of what you deposit, and that money comes out of your account, not theirs.
None of this means every annuity is a bad deal.
Some people genuinely want to hand off longevity risk and will pay for it.
The problem is buying one without knowing the price.
Ask what the all-in annual cost is, get it in writing, and compare it to what your money could earn elsewhere.
Final Thoughts
If the salesperson dodges the question, that's your answer.