With interest rates still elevated and stock market swings making plenty of Americans nervous, sales of these insurance-backed retirement products climbed to record levels in recent years.
But the same contracts promising "guaranteed income for life" often carry layers of fees that can quietly shrink your nest egg for decades.
Unlike a plain index fund, where you can spot the expense ratio in seconds, an annuity can bury costs inside the product.
That makes it hard to know what you're actually paying — and what that money could have earned if it stayed invested.
Here's the first thing to understand: annuities come in several flavors, and each one charges differently.
Fixed annuities are the simplest and usually the cheapest, often with no explicit ongoing fee.
But variable annuities, which tie your money to investments, can stack a mortality and expense charge, fund management fees, and optional rider costs.
Tally those up and you're often looking at 2% to 3% a year or more.
But on a $200,000 account, a 2.5% annual drag is roughly $5,000 a year vanishing before your money even gets a chance to grow.
Over 20 years, the compounding you lose can dwarf the fees themselves.
A fee that feels small in year one becomes a serious haircut by year twenty.
Sign up, change your mind two years later, and you could owe 7% to surrender the contract — a penalty that typically steps down over seven to ten years.
Some contracts also charge for withdrawals beyond a set amount, and many cap how much you can pull out annually without a penalty.
The riders are where things get murkiest.
That "guaranteed lifetime income" benefit you bought?
It usually carries its own annual fee, often 0.5% to 1.5%, and it may come with rules about when you can start payments and how much you can withdraw.
Miss the fine print and you can trigger penalties or lose the guarantee entirely.
Income annuities, where you hand over a lump sum for a stream of payments, flip the math.
They're generally simpler and don't pile on the same ongoing fees — the insurer builds its cut into the payout rate.
That can make them worth a look if lifetime income is the real goal, not tax deferral or market exposure.
For some retirees, the predictability is worth the cost.
The problem is buying one without doing the arithmetic.
Ask for the total annual cost in dollars, not percentages.
Ask what the surrender schedule looks like.
If a salesperson can't put those numbers on paper, that's your answer.
Before you sign anything, compare the annuity against a plain, low-cost alternative and run the numbers side by side.
Sometimes you're just paying a lot for peace of mind you could buy cheaper elsewhere.
Our take: annuities are a tool, not a trap — but the fees are real and often invisible until you dig.
Final Thoughts
Anyone selling you one should be able to explain every dollar you're paying and why.