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When it comes to retirement planning, annuities are one of the financial tools that tend to divide opinion. Some people love annuities for the predictable income they offer. Others shy away, wary of extra fees, the perceived complexity and the idea of giving up a lump sum in exchange for future payments. Whether you’re nearing retirement or just thinking ahead, though, understanding what an annuity actually costs — and whether it’s worth buying — can help you decide if this type of retirement tool should be a part of your financial strategy.
Annuities work kind of like a self-made pension. You hand over a lump sum of money to an insurance company, and in return, you receive a set amount of income in the future, either for a fixed period or for the rest of your life. The idea is to create a stream of reliable income that you won’t outlive. But just like with any long-term investment, what you gain in security might come at a price, both financially and in terms of flexibility.
So, how much will an annuity cost you? And does the peace of mind an annuity offers outweigh the potential trade-offs? Let’s break down the real costs of annuities and help you figure out whether they’re the right fit for you.
See how much money you could get from a monthly annuity here.
How much does an annuity cost?
At face value, buying an annuity might seem simple: You pay a one-time premium and you get a guaranteed stream of income. The initial premium for an annuity typically ranges from $5,000 to $1 million or more, though some companies may accept as little as $2,500 for qualified retirement accounts.
The type of annuity significantly impacts cost, however. For example, fixed annuities generally have lower entry points (about $5,000 to $10,000) compared to variable annuities which might require $25,000 or more. Immediate annuities could require larger initial investments of $50,000 to $200,000, as they begin paying out shortly after purchase.
Beyond the premium, annuities can include various fees that affect their true cost. These typically include:
- Administrative fees: Annual charges of around 0.1% to 0.3% of the account value for record-keeping and customer service
- Mortality and expense risk charges: Typically about 1.25% to 1.65% of the account value annually to cover the insurer’s risks
- Investment management fees: Ranging from 0.5% to 2.0% of the account value annually for variable annuities
- Surrender charges: Generally 2% to 10% of withdrawn amounts, decreasing over a period of seven to 10 years
- Rider fees: Optional benefits like guaranteed minimum income benefits or death benefits can cost 0.25% to 1% of the account value annually
These fees can significantly impact returns over time. For example, a variable annuity with combined annual fees of 3% would reduce a 7% annual return to just 4%, substantially affecting long-term growth. That’s why it’s essential to read the fine print and get a clear breakdown of all fees before you buy.
Find out how to get started with an annuity today.
Are annuities worth it?
Whether annuities are worth their cost depends on your individual financial situation and goals. For certain investors, the benefits may outweigh the costs.
That’s because annuities provide guaranteed income, which can be valuable for retirees concerned about outliving their savings. This longevity insurance aspect is particularly beneficial for those with family histories of long lifespans or without other guaranteed income sources beyond Social Security.
Tax deferral is another potential advantage. Annuity earnings grow tax-deferred until withdrawal, which can be beneficial for high-income individuals who have already maxed out other tax-advantaged accounts like 401(k)s and individual retirement accounts (IRAs).
However, annuities may not be worth the cost for everyone. For example, investors with sufficient retirement income from other sources might find better value in more liquid investments with lower fees. Those who don’t expect to live long past retirement might not recoup their investment through annuity payments.
The complexity of many annuity products can also make it difficult to understand exactly what you’re paying for. Variable and indexed annuities, in particular, often have complicated fee structures and return calculations that can obscure their true costs and benefits.
The potential surrender charges also limit financial flexibility. If emergency needs arise and you need to withdraw money early, you could face substantial penalties, reducing the overall value of your investment.
The bottom line
Annuities can be valuable retirement tools for the right person, but they require careful consideration of both costs and benefits. The initial premium investment, which can range anywhere from $5,000 to $1 million or more represents just part of the equation. The various fees and charges that come with these retirement tools can also add to the costs and significantly impact your returns over time.
If you do decide an annuity fits your needs, shop around for the best terms. Fees and benefits vary widely between providers, and even small differences in fee percentages can substantially impact long-term performance. And remember that the best retirement strategy is typically diversified across multiple income sources and investment types. Annuities might form one part of your plan, but they rarely should constitute the entirety of your retirement savings.