Millions of Americans nearing retirement get told an annuity will protect their money for life.
What the sales pitch often leaves out is the stack of fees that comes with it, and how much those fees can shave off over 20 or 30 years.
Annuities are insurance products that pay you income, sometimes for life.
Some of those charges are one-time, and some quietly recur every single year, whether your account grows or not.
If you put money into an annuity and need it back early, you can pay a penalty of 7% in year one, sliding down to maybe 1% or 2% before it disappears, often after seven years.
That's money you already owned, now costing you to access.
Mortality and expense fees, administrative fees, and fund management fees inside variable annuities can add up to roughly 1% to 3% a year.
Add an income rider, and the annual drag can climb even higher.
On a $100,000 annuity, a 2% annual fee runs about $2,000 a year.
Over 20 years, with average market returns, that's tens of thousands of dollars that never compounds for you.
Fixed indexed annuities add another wrinkle.
They usually cap your upside with a participation rate or a ceiling, so in a strong market year you might capture only part of the gain.
Your downside may be protected, but the fees and caps still apply.
Fee tables sit in a prospectus or disclosure document many buyers never fully read.
If a salesperson leads with "tax-deferred growth" and "guaranteed income" but waves off the fee questions, slow down.
Ask for the total annual cost in dollars, not percentages.
Ask what the surrender schedule looks like year by year.
Ask whether a cheaper option, like a low-cost index fund or a simple term strategy, could meet the same goal.
For some people, a guaranteed lifetime income stream is worth paying for, especially if it lets them sleep at night.
The trap is paying for guarantees you don't need, or paying far more than the protection is worth.
Before signing, get the fee breakdown in writing and compare it against at least one alternative.
A second opinion from a fee-only financial advisor who doesn't sell annuities can be worth the cost.
The uncomfortable truth is that annuity fees rarely announce themselves.
They just show up as a smaller balance, year after year, and you feel it most when you finally need the money.
Final Thoughts
Read the fine print before the ink dries, because after that, you're locked in.