Key takeaways
Annuities offer a unique way to create a tax-deferred, guaranteed stream of retirement income with flexible funding, payout, and growth options.
Administrative, surrender, and other fees cover ongoing management, lifetime income guarantees, and penalties for early withdrawals within the first seven to 10 years.
Variable annuities incur additional annual investment-related expenses (typically 0.6% to 3%) to manage the underlying stock and mutual fund portfolios.
Optional riders — such as enhanced death benefits, inflation protection, and living benefits — can be added for extra security at an annual cost of about 0.25% to 1.5% of the contract value.
If you’re considering purchasing an annuity to create a guaranteed source of retirement income, it's also a good idea to consider how much it will cost you to get. Of course, the amount you put into the annuity, known as the principal, is a cost to you (one that you can recoup and often exceed in time), but there may be other fees and expenses — which can vary depending on the type of annuity — that you should be aware of to judge the trade-off between guaranteed income, flexibility, and long-term value. This guide explains how annuities work, the fees different types of annuity contracts include, and what to look for so that you can make an informed decision.
Are annuities a good investment?
Before we explore costs, it helps to review how annuities work and why annuities are a good investment for many people approaching retirement. Annuities are really the only investment product designed to provide a steady, guaranteed stream of income in retirement, like a pension. An annuity fits into a retirement plan when predictable retirement income is a priority. You can contribute to an annuity as part of your retirement strategy alongside any contributions you make to a 401(k) or an IRA. And importantly, annuities aren't subject to IRS contribution limits, so they can help you accumulate more tax-deferred retirement savings than either of those vehicles. Annuities also can be tailored to meet your individual needs, financial situation, and risk tolerance level:
You can buy an annuity with a single lump sum payment or make a series of contributions over many years.
You can have payments that are guaranteed to last a lifetime or for a fixed number of years.
You can start getting income immediately or several years down the road.
You can opt to leave a death benefit for your heirs — or not.
And importantly, depending on the type of annuity you choose, you can opt for the safety of guaranteed fixed returns, the market growth potential of variable returns, or a fixed-index or registered index-linked annuity (RILA) that links growth to a market index while also helping protect principal.
That concern is common. In Guardian's 15th Annual Workplace Benefits Study, 37% of Americans named not having a guaranteed source of income in retirement as one of their top retirement worries. As Financial Advisor Gary Sirak put it in the same report, "Retirement isn't about maximizing returns — it's about creating income you can't outlive so you can spend your money with confidence, knowing your lifestyle and legacy are protected no matter how long you live."1
The types of costs and fees that can come with annuities
Once you understand the costs and why these charges and fees are included, you can better decide whether an annuity is worth the overall investment. That's why it's so important to carefully read over your annuity contract and ask your financial advisor or annuity provider to explain all the costs and fees involved before deciding to invest. Most contract types share the same broad fee categories, including:
Administrative fees
Mortality/mortality and expenses (M&E) fees
Surrender fees
Variable fund expenses
Optional rider fees
Administrative, mortality, and surrender fees
Part of your annuity cost may include an administrative fee, which covers the ongoing management of your annuity. This fee may be a percentage of the value of the contract or a flat yearly amount.2
Variable annuities provide income guarantees based on underwriting assumptions about your life expectancy and other factors. The mortality fee (also called mortality and expenses) is intended to offset the cost of providing those guarantees. Fees can range from about 0.25% to 1.75%, depending largely on the type of annuity.3
A surrender fee may apply if you choose to draw money from your annuity before the surrender period associated with your contract is over. It can be as high as 10% of the value of your contract, but these surrender charges usually decrease each year and are typically only in effect for the first seven to 10 years after the annuity purchase.1
Variable annuities also charge investment-related fees
With these annuities, the principal is generally invested in funds linked to the value of stocks and mutual funds. Each has additional investment fund fees inside the contract, which are charged to manage and administer the fund and can range from 0.6% to 3% per year.
Optional riders
When you purchase an annuity, you may be able to include optional riders, which offer additional benefits not included in the base contract. These additional benefits can increase what you pay each year. The cost of each rider varies but can typically range from 0.25% to 1.5% of your contract value per year. Some of the more common riders include:
Death benefit: This optional feature provides a guaranteed payment to designated beneficiaries upon your death, which may be higher than the current account value.
Cost of living/inflation rider: This can increase annuity payments over time to help offset the effects of inflation.
Living benefit/income rider: This will provide guaranteed income while preserving access to your account value.
Guardian can help
The costs of an annuity can be complicated. If you’re thinking about purchasing an annuity as part of your retirement planning, it's important to find out as much as you can about any fees to decide whether they are worth the benefit of having a guaranteed lifetime income. Want to talk it over with someone? A local Guardian financial advisor can help you compare annuity quotes, determine whether a specific annuity fits your needs, and help you learn more about the different types of income annuities and their associated costs, explain how a variable annuity differs from a fixed annuity, and evaluate which might be the best choice for your needs.
