Annuities are sold as a way to turn a lump sum into steady retirement income, but the fees baked into many contracts can shrink what actually lands in your checking account.
The problem is that those costs rarely show up as one clean line item.
They're spread across mortality charges, administrative fees, rider costs, and fund expenses that compound year after year.
According to industry research, the average variable annuity carries total expenses around 2% to 3% annually once you stack the base contract fee with optional riders.
On a $200,000 account, that's roughly $4,000 to $6,000 leaving the balance every year — before any market losses.
Over a 20-year retirement, the drag can easily exceed six figures.
A mortality and expense charge typically runs 1% to 1.25%, paying the insurer for guarantees and profit.
Administrative fees add another 0.1% to 0.3%.
Then come riders — the income, death benefit, or long-term care add-ons that can each cost 0.5% to 1.5%.
Finally, the subaccounts inside a variable annuity charge their own fund expenses, often another 0.5% to 1%.
Surrender charges are the trap that keeps buyers locked in.
Most contracts impose a 7-year schedule starting around 7% and stepping down each year.
Sell early and you can lose a chunk of your principal.
Many insurers also levy a market value adjustment if you exit during a period of rising rates.
Fixed indexed annuities play a different game.
They skip the fund fees but cap your upside with participation rates, spreads, and caps that change at the insurer's discretion.
A contract might promise a 9% cap one year and quietly drop it to 5% the next.
That lost growth is a cost even if no fee line shows it.
First, ask for the fee table in writing and add every percentage together.
Second, compare the total against a simple alternative — a low-cost index fund plus a ladder of Treasury bonds or a fee-only immediate annuity.
Third, check whether the riders you're paying for overlap with benefits you already have elsewhere.
If you already own an annuity, request an in-force illustration showing fees and projected values under current assumptions.
Some contracts offer a free "1035 exchange" to a cheaper version from the same insurer, though new surrender periods may apply.
A fee-only fiduciary advisor who doesn't sell annuities can review the math for a flat hourly rate.
One more note: state insurance departments regulate these products, and the SEC's investor education site publishes plain-English guides on variable annuity costs.
It's worth 20 minutes before you sign anything.
The bottom line is that annuities aren't automatically bad — a low-cost immediate annuity can be a reasonable way to guarantee income you can't outlive.
The real damage comes from layered fees on complex products sold with a commission incentive.
Ask what the seller earns, add up every percentage, and make them justify it in dollars, not decimals.
Final Thoughts
If the answer takes more than a minute, that's your answer.