Annuities are sold as a simple way to turn savings into a guaranteed paycheck for life.
What often goes unmentioned in the sales pitch is how many fees can sit between your money and that check.
The word "guaranteed" does a lot of heavy lifting in annuity marketing.
It refers to the income stream, not to the size of it.
By the time layers of charges come out, the number landing in your account can look very different from the illustration you were shown.
Annuity fees generally fall into a few buckets.
There's the mortality and expense charge, an annual percentage skimmed off your account value.
There are administrative fees, often a flat dollar amount.
Then there's the cost of any rider you add, like a guaranteed income benefit, which can run meaningfully higher than the base contract.
The number that catches people off guard most often is the surrender charge.
Leave the contract early and you can owe a percentage of your account value that starts high and steps down over several years.
In a bad market, that penalty can lock you in right when you'd rather move.
Variable annuities with living benefit riders have historically carried total annual costs that can run into the low single digits as a percentage of assets, according to industry fee disclosures.
On a $200,000 account, that's thousands of dollars a year, every year, whether the market is up or down.
Fixed indexed annuities add their own wrinkle.
They don't charge an explicit fee the same way, but they cap your upside through participation rates and spreads.
Those caps function like a fee you never see on a statement, and they reset periodically at the insurer's discretion.
A plain index fund might cost a fraction of a percent per year.
An annuity with riders can cost several times that.
The tradeoff is real: you're paying for longevity protection and tax deferral, not for free money.
For some retirees, a steady lifetime income floor is worth the cost, especially if it lets them spend without fear of outliving their savings.
The problem is when buyers don't know what they're paying or what they gave up.
Before signing anything, ask for the total annual cost in dollars, not percentages.
Ask how long surrender charges last and what the caps or participation rates are on an indexed product.
Ask whether a fee-only advisor who doesn't earn a commission would recommend the same contract.
Also check the insurer's financial strength ratings, since the guarantee is only as solid as the company behind it.
And compare the income you'd get from the annuity against what a Treasury ladder or a simple withdrawal plan could produce.
Annuities can serve a purpose in the right retirement plan, but they are rarely the bargain they're presented as.
Read the fee table before you read the brochure, and make the salesperson put every cost in writing.
Final Thoughts
If they can't explain the charges in plain English, that alone tells you something.