Annuities: You Were Told It Was Safe. Here Is What Safe Actually Costs You.

Every year, people who have saved carefully, invested wisely, and built real wealth hand a significant portion of it to insurance companies in exchange for guarantees they may never use, at costs they were never shown clearly. This is not because they are unsophisticated. It is because these products are designed to be difficult to evaluate, and the people selling them are not required to put your interests first.

Here’s what the pitch leaves out.

What you are actually buying

An annuity is an insurance contract. The pitch is simple: hand over your money, get protection from market losses, and receive guaranteed income for life. It sounds like the responsible, grown-up move, especially if you are close to retirement and markets feel uncertain.

The reality is considerably more complicated.

Variable annuities typically carry total annual costs in the range of 3% to 4% per year. Those costs are layered across several line items: a mortality and expense charge, fees on the underlying investment sub-accounts, and additional charges for any income or death benefit riders you elected. Each one sounds small in isolation. Together they are substantial.

What you give up compared to a diversified portfolio

This is the conversation that rarely happens in the sales meeting.

A simple, diversified portfolio of low-cost stock and bond funds has a long, well-documented track record. Over rolling 10-year periods going back to 1926, the S&P 500 has returned an average of approximately 10.5% annually. A blended portfolio of stocks and bonds has historically produced strong, compounding growth at a fraction of the cost of an annuity.

Variable annuities, by contrast, have historically delivered returns significantly below what the underlying markets actually earned, because fees compound in reverse just as powerfully as returns compound forward.

That is a difference of more than $400,000 on a single $100,000 investment. The annuity did not deliver safety. It delivered a drag that compounded silently, year after year, while the sales illustration showed a guaranteed income number that felt reassuring in the moment.

Indexed annuities are often pitched as a middle ground: some upside, protection on the downside. But they come with performance caps that limit how much of a rising market you can capture. Historically, a hypothetical indexed annuity with a 1% floor and 5% cap has produced an average annualized return of around 3.8%, compared to 10.5% for the S&P 500 and 5.1% for intermediate-term Treasuries. The cap does not just trim your upside in good years. Over time, it costs you more than the floor ever saves you.

A well-constructed, diversified portfolio, rebalanced over time and managed with a clear income strategy, is not a riskier alternative to an annuity. For most people approaching or in retirement, it is the more reliable path to the outcome they are actually trying to reach. Learn more about why fee-only, fiduciary advice makes a difference →

The guarantees have fine print

The income guarantees in these products, called living benefit riders, are the main selling point. They are also the most misunderstood feature.

The guarantees are only worth anything if your account performs poorly. If your investments do well, the guarantee is irrelevant. You are paying for insurance against a scenario that, over long time horizons, is historically unlikely.

Most riders require a waiting period of up to 10 years before you can access the guaranteed income. If you need the money before then, the guarantee does not apply. When you eventually activate the income, you may be required to annuitize, meaning you hand control of your principal to the insurance company entirely. That decision is usually irrevocable.

Insurance companies can also limit your investment options inside the contract to protect their own exposure. Several major carriers have reduced equity allocations within annuities during volatile markets, which means your account may grow more slowly than you expected, even before fees.

Getting out is expensive

These contracts are not designed for easy exits. Surrender periods typically run seven to ten years, with early withdrawal penalties starting around 7% and declining gradually. If you decide the product is not right for you in year two, leaving may cost you thousands of dollars.

Agents who sell annuities with longer surrender periods generally receive higher commissions. The SEC has stated explicitly that surrender charges are a type of sales charge used to compensate the selling agent. That is a structural conflict of interest your financial professional should be disclosing clearly.

The tax story is not what it sounds like

Annuities grow tax-deferred, which sounds like a benefit. But withdrawals are taxed as ordinary income, not at the lower long-term capital gains rate. If your tax rate in retirement is meaningful, this difference matters.

FINRA has noted that holding a deferred annuity inside an IRA provides no additional tax advantage. You are already inside a tax-deferred account. Adding an annuity wrapper on top of it means you are paying significant fees for a benefit you already have.

What happens when you pass away

Most variable annuities do not receive a step-up in cost basis at death, unlike nearly every other investment type. Your beneficiaries inherit the annuity gains and pay ordinary income taxes on them. If they are in a high bracket, this is a meaningful disadvantage compared to inheriting a taxable brokerage account with a full step-up in basis.

Why this keeps happening

Commission-based insurance agents are not required to act in your best interest. They are held to a suitability standard, which means the product only needs to be arguably appropriate for your situation, not optimal for it. A variable annuity sold to someone in their late fifties is almost certainly “suitable” under that standard, even if a low-cost portfolio strategy would serve them far better.

Fee-only fiduciary advisors are legally obligated to put your interests first at all times. We do not earn commissions. We do not receive payments from insurance companies. Our compensation comes directly from you, and our only interest is your outcome. That distinction is not marketing language. It is a legal and structural difference, and it matters enormously when the stakes are a 20 or 30-year retirement.

What to do if you own an annuity, or are being pitched one

If you already own one, get a copy of your contract and read the fee disclosure pages. Add up the total annual cost. Then ask yourself whether those fees are justified by a benefit you will actually use.