Annuities have a reputation problem, and it mostly comes down to one word: fees.
An insurance agent sells you a contract that promises income later, and buried in the fine print are charges that can chip away at your returns year after year.
Understanding what those fees actually are is the difference between a useful retirement tool and an expensive surprise.
You usually don't see it written as a line item, because it's baked into the contract.
An agent might earn 1% to 7% of your premium up front, depending on the product.
It comes out of the value of your annuity, which is one reason many contracts take years just to break even.
Variable annuities often carry mortality and expense fees, typically around 1% to 1.25% of your account value each year.
Add in fees for the underlying mutual funds, which can run another 0.5% to 1.5%, and you're already looking at costs that rival or exceed a typical 401(k).
A guaranteed income rider sounds comforting, but it can cost 0.5% to 1.5% annually on top of everything else.
Stack a death benefit rider and a long-term care rider, and you can easily push total annual costs past 3%.
On a $200,000 contract, that's more than $6,000 a year working against you.
If you want out in the first several years, you'll typically pay 7% in year one, sliding down to 1% or so by year seven.
It's a penalty designed to keep you in the contract long enough for the insurer to recoup what it paid the agent.
They usually have no explicit annual fee, because the insurer just credits you a set rate and keeps the spread.
That doesn't mean they're free, it means the cost is invisible.
A fixed annuity paying 4% when comparable Treasury yields are higher is quietly charging you the difference.
Ask for the fee table in writing, not a verbal summary.
Request the total annual cost as a percentage, including fund expenses and riders.
Then ask what the surrender schedule looks like year by year and what your actual payout would be if you started income today.
One practical rule: if an annuity salesperson can't tell you the all-in annual cost within about a minute, that's a signal to slow down.
Confusion usually benefits the person selling, not the person buying.
A low-cost fixed or income annuity can be a reasonable way to turn a lump sum into a paycheck you can't outlive.
But the fees decide whether that guarantee is worth it.
Final Thoughts
Run the numbers, compare against simply holding bonds or a low-cost fund, and don't sign anything on the same day you first hear the pitch.