With annuity sales reaching $108.5 billion in the second quarter of 2024 — a 25% increase from the same period in 2023 — it’s clear that consumer interest in annuities is surging. But many consumers remain uncertain about how much an annuity actually costs.
Answering this question goes beyond explaining minimum investments; it requires financial professionals to help consumers understand the various costs involved and how to align their decisions with long-term retirement goals.
Understanding annuity costs: More than just the minimum
Annuities are complex products with a wide range of costs that extend far beyond the minimum investment requirements. Here are the key factors that financial professionals should communicate to consumers:
Minimum investments
The minimum investment for annuities varies greatly depending on the type of annuity:
- Fixed annuities often have lower entry points, sometimes as low as $1,000.
- Variable and indexed annuities typically require higher minimums, ranging from $5,000 to $25,000.
- Immediate annuities, which begin payouts shortly after purchase, demand the highest initial investments, generally between $50,000 and $100,000.
However, simply meeting the minimum investment may not provide a sufficient income stream for retirement. For instance, while $50,000 might be enough to buy into an immediate annuity, that sum may not generate a substantial payout without additional investments. It’s important to emphasize to clients that securing a meaningful income stream often requires investing well above the minimum threshold.
Fees and commissions
Beyond the initial premium, annuities come with a variety of fees that can impact returns. Administrative fees typically hover around 0.3% of the annuity’s value, while mortality expenses can range from 0.5% to 1.5%. For consumers considering variable or indexed annuities, additional management fees tied to the performance of underlying investment accounts may apply.
Commissions also play a significant role in annuity pricing. These commissions, which are built into the product, can range from 1% to 8%, depending on the annuity’s complexity. By explaining how these commissions work, financial professionals can ensure transparency and help consumers understand how fees affect their long-term returns.
Helping consumers accumulate funds for annuities
Preparing consumers for an annuity purchase is more than just explaining costs. It involves offering clear strategies to accumulate the necessary funds. Here are two smart approaches:
Consistent savings plans
For consumers who are still several years away from retirement, deferred annuities provide a way to spread out premium payments. In some cases, consumers can start with as little as $100 a month. Automatic, consistent contributions can build substantial capital over time, reducing the need for a large lump sum when it’s time to convert the annuity into an income stream.
Encouraging consumers to adopt disciplined savings strategies early can ease the burden of purchasing an annuity later in life, ensuring they’re better prepared when the time comes.
Reallocating retirement assets
For consumers with existing retirement portfolios, reallocating part of their 401(k) or IRA to an annuity can be a strategic move. This approach can secure a guaranteed income stream in retirement while leaving the remaining assets invested for growth.
Since 2022, the SECURE Act 2.0 has made it easier to purchase annuities within retirement accounts, allowing consumers to benefit from tax deferral while securing lifetime income. This strategy can be a win-win for many, providing both immediate stability and long-term growth potential.
Paving the path to confident annuity purchases
Many consumers are overwhelmed by the number of annuity options and the associated fees. A recent survey showed that 84% of consumers rely on their financial professional to explain annuity products, and those who felt knowledgeable about their purchase reported significantly higher confidence..
When consumers ask, “How much does an annuity cost?”, they’re not just looking for a price — they’re seeking reassurance that their financial future is secure. As financial professionals, we have the opportunity to provide that reassurance by breaking down annuity costs, offering strategies to accumulate the necessary funds, and guiding consumers to make informed decisions that align with their retirement goals.
