How much do annuities cost?

If you’re considering purchasing an annuity to create a guaranteed source of income in retirement, 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 make an informed decision.

Are annuities a good investment?

Before we explore costs, it helps to review what they do 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. 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 RILA annuity that provides a measure of market growth potential while also limiting your investment risk.

The types of costs and fees that can come with annuities

Once you understand the costs and why they're 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. Specific items to look for include:

• Administrative Fees

• Mortality/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.

Variable annuities provide income guarantees based on underwriting assumptions about your life expectancy and other factors. The mortality fee (also called mortality & expenses, or M&E) is intended to offset the cost of those providing those guarantees. Fees can range from about 0. 25% to 1.75%, depending largely on the type of annuity.

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 fees usually decrease each year and are typically only in effect for the first 7-10 years after the annuity purchase.

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 a variable fund expense, which is 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. 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 professional can 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 which might be the best choice for your needs.