Sales pitches for annuities love to talk about guaranteed income for life.
What they usually skip is the long list of fees baked into the contract that can quietly chip away at your nest egg year after year.
If you are sitting on a retirement rollover offer, it pays to know exactly what you are signing up for before the paperwork hits the table.
When you buy an annuity, the person selling it typically earns a payout that can range from 1% to 7% or more of what you invest, depending on the product.
That money does not come out of thin air.
It is built into the terms you agree to, which is one reason a freshly purchased annuity can be worth less than what you put in if you try to walk away early.
Many variable annuities carry a mortality and expense fee, often somewhere around 1% to 1.5% a year, plus fund management fees on the underlying investments.
Add riders like a guaranteed income benefit and you can stack on another 0.5% to 1.5% annually.
A single contract can easily run 2% to 3% a year in total costs.
Surrender charges are the trap that catches people off guard.
If you want out during the early years, you can face a penalty that starts around 7% and steps down over a set schedule, sometimes taking seven years or longer to disappear.
That means money you thought was liquid may be locked up right when you need it most.
Fixed annuities are not automatically cheap either.
Some come with lower headline fees, but they may pay a modest rate and include surrender schedules or market value adjustments that reduce what you get back if rates move against you.
The lesson is the same across the board: the fee structure, not the sales pitch, tells you what you are really buying.
Ask for the fee table in writing, not a verbal summary.
Request the surrender schedule in plain numbers.
Compare the total annual cost against a simple mix of low-cost index funds and see whether the guarantees are worth the drag.
If an agent gets fuzzy about any of this, that is your answer.
One more move that costs nothing: check whether the annuity fits inside an already tax-advantaged account.
Putting one in an IRA often stacks fees on top of tax benefits you already have, which is a common and expensive mistake.
The bottom line is that annuities can make sense for some retirees who truly want a pension-like paycheck and can handle the lock-up.
But the fees are real, they compound, and they are rarely explained in the first meeting.
Final Thoughts
Read the fine print, run the math, and never let a deadline pressure you into a decision this big.