With interest rates still elevated compared to the past decade and millions of Americans worried about outliving their savings, sales of these insurance products hit record levels in recent years.
But the same contracts promising lifetime income often carry layers of fees that can quietly shrink what you actually keep.
That gap between what an annuity advertises and what it pays out is where retirement dollars go missing.
Commission-based annuities, the kind sold by agents, often bury a sales charge inside the contract rather than showing it as a line item.
That commission can run 4% to 8% of your initial premium, according to industry data, and it comes out before your money ever starts growing.
Variable annuities typically layer on mortality and expense charges, fund management fees, and administrative fees that together can run 2% to 3% annually or more.
Add popular riders like guaranteed lifetime withdrawal benefits, and you can tack on another 0.5% to 1.5% per year.
On a $200,000 balance, that's easily $5,000 to $7,000 gone annually, compounding against you every year you hold the contract.
Fixed indexed annuities play a different game.
They don't charge an explicit annual fee in many cases, but they cap your upside through participation rates, spreads, and caps that reset at the insurer's discretion.
In a strong market year, your index might gain 20% while your annuity credits 6%.
That missing return is a cost, even if it never appears on a statement.
The surrender charge is the trap that keeps people locked in.
Most annuities impose a schedule that starts around 7% to 10% in year one and steps down to zero over five to ten years.
Retirees who get buyer's remorse in year two can face a penalty larger than their annual returns, which is precisely why so many people stay put.
Ask for the total annual cost in dollars, not percentages.
Find out how long the surrender period lasts and what the caps and participation rates are for indexed products.
Compare the guaranteed payout against simply holding Treasury bonds or a low-cost immediate annuity bought through a fee-only broker.
A straightforward immediate annuity or a low-cost income rider can provide genuine peace of mind for someone who needs guaranteed cash flow and has no pension.
The problem isn't annuities as a category.
It's buying one without knowing what it costs.
Our take: the fee disclosure you get upfront is usually the floor, not the ceiling.
If an agent can't or won't put total annual costs in writing in plain dollars before you sign, that silence is your answer.
Final Thoughts
Shop at least two fee-only quotes and read the surrender schedule twice before committing a single dollar.