2 Reasons High-Fee Annuities Can Drain Your Retirement

Annuities may be a go-to investment option for retirees with a high net worth that value comfort, customizability, and certainly above all else. Of course, they’ll need to pay the price in the form of (likely) higher fees and commissions to obtain an instrument that fits their specific needs. And while there are more than a handful of ways to get a safe and sound passive income stream that lasts for the long haul, there’s really no denying the past popularity of the instrument.

It’s been a retiree staple for such a long time, and while some subtle signs suggest they’re just starting to lose their luster (their peak may have come over a year ago), annuities remain just one of many tools for investors looking to lean heavily on fixed income. Indeed, the higher interest rate (think two years ago) environment saw annuities have their heyday. After a few rate cuts, the instrument may not be as appealing, especially given the past two-year run in the stock market.

With so many impressive dividend stocks and REITs out there that offer remarkable growth, the opportunity costs of settling for an annuity have seemingly increased. In any case, the return of stock market volatility may very well cause the tides to turn right back in favor of annuities. With the S&P 500 fresh off a 10% correction, it’s not hard to imagine many retirees looking to derisk or rebalancing towards those stabler assets. 

Even if demand for stability grows again, I’m unsure annuities will have a comeback year. At best, it could be a mild bounce-back year for the asset class as the risk-off mentality returns. However, their high fees, increased complexity, I believe, could hold them back, at least compared to other asset classes out there.

Higher fees and commissions can sting

When interest rates were quite a bit higher, the higher administrative fees and commissions to the salesperson are more justifiable. However, when rates fall, the hunt for yield gets tougher, and the pain of fees and commissions is felt much harder. Indeed, annuity fees can really add up, especially as the costs of living rocket ever higher.

Of course, you can choose annuity products that entail lower fees (variable annuities tend to be pricier), but you should understand that you’re paying up for such a product that may or may not offer a good bang for your buck, especially if you’ve got a higher risk tolerance than a traditional annuity buyer (think affluent Baby Boomer retirees). If you’re a rather young retiree (let’s say you’ve got 15+ years to invest), the higher fees could take away from your ability to compound your wealth. But, at the end of the day, if growth and returns were a priority, you probably wouldn’t be looking at annuities to begin with!

Higher fees can take away from your ability to hit back at inflation 

With Trump tariffs threatening to increase prices on a wide range of consumer goods, getting locked into an annuity for a number of years may seem less than ideal as we move into the latter half of the decade. If you’re looking to withdraw cash early, you’ll be on the hook for surrender charges, adding to the already hefty bill of fees incurred.

Though annuities offer less in the way of negative surprises (like the Trump tariff-induced stock slump), it’s my personal opinion that most annuities are not the best instruments to navigate an inflationary environment. Indeed, TIPS (Treasury Inflation-Protected Securities) may be the way to go if staying ahead of rising inflation is your number-one objective. And, of course, stocks are a place to go to keep up with the pace of inflation since firms often pass higher prices onto consumers.

That’s not to say that every investor should write off annuities. They can make sense for those who understand them well and must have a certain set of attributes from their passive income stream. As always, contact a retirement planner if you’re looking for a better gauge of the price you’ll end up paying with a high-fee annuity versus comparable lower-fee products.

The bottom line

If you’re still fine with paying up, annuities can make sense for risk-averse retirees looking to further diversify their portfolios with stable products that can hold up when financial markets have really nasty storms. The big question for 2025, is whether annuities will experience a comeback as volatility rocks markets. 

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