Annuities are pitched as a simple way to turn savings into lifetime income.
What the brochures rarely lead with is how much of that money goes to fees before a single check arrives.
Between surrender charges, mortality expenses, and rider costs, retirees can lose a meaningful slice of their principal without ever seeing an itemized bill.
The first hit often comes at the point of sale.
Commission-based annuities can carry upfront charges of 5% to 7%, baked into the contract rather than billed separately.
That means a $200,000 deposit might only start working with $186,000 or so, depending on the product and the agent's payout.
Then come the ongoing fees, which compound quietly year after year.
Mortality and expense charges typically run 0.5% to 1.5% annually, while administrative fees add a bit more.
If you attach an income rider for guaranteed lifetime withdrawals, expect another 0.5% to 1.5% per year on top, even in years when the market drops.
Surrender charges are the trap that catches people who change their minds.
Most contracts lock in a 7-year schedule that starts around 7% and steps down gradually.
Withdraw too much too soon and you can owe a penalty on top of ordinary income tax, plus a 10% IRS hit if you're under 59½.
Variable annuities add a layer that's easy to miss: fund expenses inside the subaccounts.
Those can run 0.2% to 2% or more, depending on what you pick, and they're charged on top of everything else.
Stack the layers and a variable annuity with a rider can cost 3% or more a year.
Fixed indexed annuities aren't immune either.
They often cap your upside with participation rates and spreads, then tack on rider fees.
You get downside protection, but the trade-off is a ceiling that can leave you trailing simple alternatives over a long retirement.
Ask for the fee table in writing before you sign anything, and insist on seeing the total annual cost in dollars, not just percentages.
Compare that number against a low-cost alternative, like a plain index fund plus a ladder of Treasury bonds or a CD ladder, and see which actually leaves you more income.
If you already own an annuity, dig out the prospectus or contract and find the "charges and deductions" section.
A fee-only fiduciary advisor can review it for a flat fee, usually a few hundred dollars, and tell you whether a 1035 exchange to a cheaper contract makes sense.
Just remember that swapping policies can restart surrender periods, so run the math first.
One more tip: never buy an annuity inside an IRA.
You're already getting tax deferral from the IRA, so you're paying for a benefit you don't need.
That single mistake costs some retirees thousands over time.
Annuities can serve a real purpose for people who want guaranteed income and can stomach the cost.
But the fees are real, they're often hidden in fine print, and they deserve the same scrutiny you'd give any other major purchase.
Final Thoughts
Read the contract, ask blunt questions, and don't let a sales pitch rush a decision that could shape the next 20 years of your retirement.