How Much Does an Annuity Actually Cost?

Annuities are often seen as a safe choice for retirement because they provide a steady stream of income. But lately, some people are finding them less appealing because of hidden costs and confusing terms. Let’s break down what annuities really cost and why they might not be as great as they once seemed.

What Are Annuities and Why Are They Less Popular Now?

An annuity is a financial product that gives you regular payments, usually during retirement. It sounds simple: you pay some money, and then you get paid back regularly when you’re older. However, many people are rethinking this because of a few problems: how the market performs, confusing rules on returns, and hidden fees that can really add up.

Hidden Fees in Annuities

One of the biggest downsides of annuities is the hidden fees. Here are some of the main costs that might be buried in an annuity contract:

• Commissions: When you buy an annuity, an insurance agent or financial advisor usually gets a commission. This means they take a cut from your returns or even from the money you put in.
• Underwriting Costs: These fees pay the people who take the risk of guaranteeing your payouts.
• Fund Management Fees: If your annuity invests in mutual funds, you also have to pay management fees, which are passed on to you.
• Withdrawal Penalties: If you want to take out your money early and you are under 59½ years old, you’ll face a 10% penalty from the IRS. Plus, the company may charge a “surrender fee” of 5% to 10%. This fee usually gets smaller the longer you hold the annuity, but it can still be a lot if you need your money early.

Other Costs to Keep in Mind

• Tax Opportunity Cost: Annuities let your money grow without taxes until you withdraw it, but that doesn’t always mean you’re getting the best tax benefit. It might be better to put your money in a 401(k) first, where you can invest pre-tax dollars. Only consider annuities after you’ve maxed out your 401(k) or other retirement plans.
• Taxes for Your Beneficiaries: If you leave an annuity to your children, they’ll have to pay taxes on the gains. Unlike mutual funds, annuities don’t get a “step-up” in value, which means your kids could end up paying more in taxes.

So, What Are Annuities?

Annuities are basically contracts that guarantee a fixed income in the future. You can pay for an annuity all at once or over time. There are a few choices to make:

• How to Pay: You can pay all at once or make payments over time.
• When to Get Paid: You can choose to get paid right away (immediate annuity) or wait for some time (deferred annuity).
• Fixed vs. Variable Income: A fixed annuity gives you a steady income. A variable annuity changes based on how well the investments do—it pays more when the market is good and less when it’s not.

Is an Annuity a Good Idea?

Whether an annuity is right for you depends on your situation. They can be good because they give you a reliable income and are easy to manage, which is great if you don’t want to worry about investments during retirement. But there are also downsides:

• Pros: Annuities provide guaranteed income and are simple to manage.
• Cons: The hidden fees, including commissions, management fees, and early withdrawal penalties, can add up. Plus, taxes can make it less beneficial for your family if you pass it on.

The Bottom Line

Annuities cost more than just the money you put in. Hidden fees and penalties can take away a big chunk of your returns. Plus, if the company offering the annuity isn’t financially stable, you could lose your money. There are some protections from the state, but they are limited. It’s smart to buy smaller annuities from different companies to reduce risk.

If you’re thinking about buying an annuity, make sure to read all the details, ask about every fee, and spread out your investments. Having guaranteed income can be comforting, but understanding the true costs will help you make the best choice for your future.