Annuities are sold as guaranteed income for life, but the paperwork rarely leads with how much of your money pays for that promise.
Between commissions, mortality charges, and rider costs, the drag can reach 2% to 4% a year in some contracts.
On a $200,000 balance, that's up to $8,000 annually working against you before you see a dime of growth.
The problem is that these fees hide in different places depending on the product.
A fixed indexed annuity might cap your upside without charging an explicit management fee, while a variable annuity spells out layers of charges that add up fast.
Knowing which bucket you're in is the first step to figuring out whether you're getting a fair deal.
Start with the surrender charge, which is the exit penalty for walking away early.
It typically starts around 7% and steps down each year over a seven-to-ten-year period.
Miss that schedule and you can lose thousands just for changing your mind.
Then there's the mortality and expense charge, common in variable annuities, which usually runs 1% to 1.5% annually.
It covers the insurer's guarantee and administrative overhead, but it's charged whether your investments win or lose.
Layer on fund expenses inside the subaccounts, often another 0.5% to 1%, and the total creeps toward 2.5%.
A guaranteed income benefit that promises lifetime withdrawals can add 0.5% to 1.5% per year, and it's often the feature that convinced you to buy in the first place.
Some contracts stack multiple riders, pushing all-in costs past 3%.
Read the fee table on page one of the prospectus, not the marketing brochure.
Variable annuity commissions can hit 6% to 7% upfront, paid to the agent out of your premium, which means less money is actually invested on day one.
Indexed annuities often pay 5% to 7% as well, though it's baked into the contract rather than deducted as a line item.
Ask for the total annual cost in dollars, not percentages, and request it in writing.
Then check the surrender schedule and whether the income rider has its own separate fee.
If an agent can't give you a straight number, that's your answer.
A few alternatives worth pricing out: a plain immediate annuity with no riders, a low-cost index fund paired with a withdrawal plan, or a fee-only advisor who doesn't earn commission.
Each has trade-offs, but at least you can see what you're paying.
Annuities aren't automatically bad, and a lifetime income guarantee has real value for some retirees.
But when fees eat 2% to 3% a year, the guarantee is partly funded by your own money.
Final Thoughts
Get the numbers in writing before you sign, and don't let a slick presentation rush a decision that locks up your savings for a decade.