With interest rates still elevated and stock market swings making people nervous, more Americans are listening when an insurance agent pitches a guaranteed income stream for retirement.
But here's what often gets buried in the sales pitch: the fees.
Several of them, stacked on top of each other, quietly shrinking the money you set aside.
The first one to understand is the mortality and expense risk charge.
That's usually somewhere between 1% and 1.5% of your account value every year, and it pays the insurer for guaranteeing your income.
Then there's the administrative fee, often a flat $25 to $50 a year, plus a per-fund management fee if your annuity invests in subaccounts.
Some variable annuities also charge an annual contract fee just to keep the account open.
Want a guaranteed lifetime withdrawal benefit or an enhanced death benefit?
Those add-ons can cost another 0.5% to 1.5% annually.
Stack a living benefit rider on top of a base contract and you're easily looking at 2% to 3% in total yearly costs.
Run the math on a $100,000 annuity with a 2.5% annual fee versus a low-cost index fund charging 0.05%.
Over 20 years, assuming similar gross returns, the fee drag can cost you tens of thousands of dollars.
That's money that would have compounded for you instead of going to the insurer.
If you change your mind and pull money out early, most annuities hit you with a penalty that starts around 7% in year one and steps down gradually, often taking seven years to disappear.
Some contracts now stretch that schedule to ten years.
There's also the MVA, or market value adjustment, on fixed annuities.
If you cash out early when rates have moved against the insurer, you can lose principal on top of the surrender charge.
None of this means annuities are automatically bad.
A plain vanilla fixed annuity with no riders and a short surrender period can be a reasonable way to lock in a rate for part of your nest egg.
The problem is when fees pile up so high that the "guarantee" costs more than it's worth.
Before you sign anything, ask for the fee table in writing.
Every state requires insurers to disclose it.
Add up every percentage, then ask yourself what that total would cost you over 20 or 30 years.
If an agent won't hand over the numbers in plain English, that's your answer.
My take: annuities are sold, not bought, and the commission structure explains why.
If you genuinely want guaranteed income, a simple low-fee product or even delaying Social Security can get you there for less.
Final Thoughts
Read the fee page before you read the brochure.