Annuities give you a guaranteed stream of income in retirement, but they aren’t created equal. With hundreds of annuities in the market to choose from, some will cost you more than others.
It doesn’t help that there are a variety of potential fees from administrative costs to commissions that can be hard to spot and will ultimately impact your payouts. How much is too much when it comes to fees and how do you know if you're paying too much?
“You absolutely have to be mindful of the fees. In some cases there are a lot of fees associated with them,” says Michael Berkhahn, CFP and vice president of Graham Capital Wealth Management. “If you are purchasing an annuity you need a good understanding of what you are getting into and if it really fits your ultimate goal.”
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Before you can do an apples-to-apples comparison of annuity fees you have to decide what you are trying to achieve. That will dictate which type of annuity to shop around for.
How does an annuity work?
If you are looking to purchase an annuity for lifetime income only, the fees will be different than if you are purchasing an annuity that pays out a death benefit to your spouse or that has additional bells and whistles. Known as riders, some of the popular ones include the following:
Guaranteed lifetime minimum withdrawal benefit: This lets you withdraw some of your money from your annuity while you are alive even if your annuity loses its value. You would only need this rider with a variable annuity.
Guaranteed minimum income benefit: This also applies to variable annuities and gives you a guaranteed minimum income payout while you are alive regardless of the performance of the underlying investments. It provides a floor and protection against market volatility.
Death benefit: This ensures beneficiaries receive a payout when you die.
Long-term care rider: If you don’t have long-term care insurance this rider boosts your monthly payouts to help cover the costs of long-term care.
Cost of living rider: With this rider your annuity payments will keep pace with inflation.
“A lot of times with annuities you get what you pay for,” says Shawn Plummer, founder of The Annuity Expert. “You're not wasting money on fees, you are adding bells and whistles and paying for those add ons.”
What do different types of annuities cost?
Investors purchase annuities for a variety of reasons but most commonly they are buying them for either guaranteed lifetime income, tax-deferred growth or to protect a portion of their assets from market risk.
If you are looking for an income stream in retirement and want to keep costs down, then a fixed annuity is the lowest cost option. With a fixed annuity fees typically range from nothing to 1.5% depending on if you add riders to the contract.
With a fixed annuity, the insurance provider guarantees a fixed rate of return for a predetermined period, giving you predictable income in retirement.
It’s similar to a certificate of deposit. You aren’t going to realize stock market returns but you will know how much you are getting each month and you don’t have to worry about fees eating away at your income.
Fixed rate annuities are also the easiest to shop for because there are little to no fees. In that case you are paying more attention to the payout, says Berkhahn. One insurer may provide a return of 5.2% while another will be 5.3%.
It’s important to be mindful of the health of the insurance provider. After all they may give you a much bigger payout but may not be around for your lifetime.
A variable annuity, the costliest of the annuities, has fees ranging from 2% to 4% but also has the potential to give you more of a return based on the performance of the investments held within the annuity.
Variable annuities are actively managed and while they can give you stock market-like returns, there is also downside risk. Yes you get guaranteed income in retirement, but how much depends on how the underlying assets perform.
“If the intent is lifetime income, then purchasing a fixed annuity would be a lot cheaper than a variable annuity,” says Plummer. “A variable annuity has the most fees.”
Other fees to pay attention to
Commissions: This is the fee that goes to the agent you work with to purchase an annuity. The commission varies based on the type of annuity and the complexity of it. The more complex, the higher the commission will be. It can range from 1% to 8%, according to Annuity.org.
Administrative fees: These are the fees that go to cover the cost of managing the annuity, recordkeeping and processing transactions in addition to other administrative costs. These fees are typically under 0.3% of the value of the annuity each year.
These fees are typically disclosed within the prospectus or through disclosures provided by the insurance company or broker. Make sure to ask about them when shopping around.
It’s all about intent
Ultimately how much you pay in fees boils down to what you want from your annuity. The more wants, the more costly it will be.
“Do you want protection with upside growth or are you looking for the highest lifetime income, or do you want long-term care protection,” says Plummer, who says you shouldn’t pay more than 1.5% in fees. “In almost every scenario you are going to pay a fee for something.”
Related content
-
What Wall Street's CEOs Are Saying About Trump's TariffsWe're in the thick of earnings season and corporate America has plenty to say about the Trump administration's trade policy.
-
The Role of the U.S. Dollar in Retirement: Is It Secure?Protect your retirement from de-dollarization, because “capital always goes where it is treated best."
-
The Role of the U.S. Dollar in Retirement: Is It Secure?
Protect your retirement from de-dollarization, because “capital always goes where it is treated best."
-
Retire in France for Beauty and CultureFrance offers a great history and a slower pace of life for retirees. At times, it can feel like stepping into a postcard.
-
To Stay on Track for Retirement, Consider Doing ThisWriting down your retirement and income plan in an investment policy statement can help you resist letting a bear market upend your retirement.
-
How to Make Changing Interest Rates Work for Your RetirementHigher (or lower) rates can be painful in some ways and helpful in others. The key is being prepared to take advantage of the situation.
-
The 'Rule of 25' for Retirement PlanningTry the simple calculation of the 'Rule of 25.' Because sometimes, a back-of-the-napkin idea is all you need to get started.
-
Within Five Years of Retirement? Five Things to Do NowIf you're retiring in the next five years, your to-do list should contain some financial planning and, according to current retirees, a few life goals, too.
-
The Home Stretch: Seven Essential Steps for Pre-RetireesThe decade before retirement is the home stretch in the race to quit work — but there are crucial financial decisions to make before you reach the finish line.
-
My Great Retirement Dream: Sell My House, Downsize, Live off the Proceeds and Dabble in Stocks. Can I Do It?I ask an expert financial planner if my retirement dreams are realistic — or if my head is in the clouds.
