If you've ever sat through a pitch for an annuity, you probably heard about guaranteed income and peace of mind.
What you may not have heard is how much of your money quietly disappears into fees before a single check arrives.
Annuities are insurance products that turn a lump sum into a stream of payments, often for life.
The problem is the fee stack layered on top, and it varies wildly depending on which type you buy.
Immediate annuities begin paying right away, and their costs are usually baked into the payout rate rather than billed separately.
Variable and indexed annuities are different animals.
They come with mortality and expense charges, administrative fees, rider fees for income guarantees, and the expense ratios of the underlying funds.
Stack those together and you can easily hand over 2 to 4 percent of your account value every year.
If you change your mind and pull money out early, typically within the first five to ten years, you can lose a percentage of what you withdraw.
That schedule often starts around 7 percent and steps down annually.
It's the reason so many buyers feel stuck.
Then there are the caps and participation rates on indexed products.
The insurer credits you based on an index like the S&P 500, but with a ceiling.
In a strong market year, your upside might be capped at 8 or 9 percent while the index gains 25.
Because higher interest rates have made annuities more attractive than they've been in years, and sales have climbed.
Advisors pushing these products don't always spell out the full cost.
A fee of 2.5 percent sounds small until you realize it can consume a third of your long-term returns.
Ask for the fee disclosure page in writing, not a verbal summary.
Compare the total annual cost against a low-cost index fund charging under 0.1 percent.
Check the surrender schedule and how long it lasts.
And if a commission-based salesperson won't put the numbers on paper, that tells you plenty.
None of this means annuities are always a bad idea.
For some retirees, the guaranteed income is worth a real cost.
But you deserve to know what you're paying for it. **The bottom line:** annuities can serve a purpose, but the fees are where retirees get hurt, and they're rarely explained clearly.
Final Thoughts
Before you sign, demand the full cost in writing and compare it to simply investing the money yourself.