Annuities are unusual products: the consequences of a bad decision don't always show up at the point of sale. They show up years later — when you need your money early, when you realize a rider you paid for never applied to you, or when you discover the contract next door was paying more the whole time. By then the cost is locked in, and getting out can be expensive. So it's worth slowing down before you sign.
What are the costliest annuity mistakes?
The costliest annuity mistakes are buying the wrong type for your goal, ignoring the surrender schedule, overpaying in fees and riders you don't need, and not shopping multiple carriers — each can quietly cost a retiree thousands. None of them are obvious in the moment, which is exactly why they're so common. The good news is that all four are avoidable with a little patience and a few pointed questions before you commit.
Below is each mistake, a quick example of how it bites, and the fix.
Mistake 1: Buying the wrong type for your goal
A retiree who wants a guaranteed paycheck for life buys a multi-year guaranteed annuity (MYGA) — a fixed, CD-like product — because the rate looked great. It grows fine, but it was never designed to turn into lifetime income efficiently. Meanwhile, the person down the street who wanted growth bought an income annuity and locked their money into a payout structure they didn't actually need yet.
Each annuity family does one job well. MYGAs are for safe, fixed growth. Fixed indexed annuities (FIAs) are for principal-protected, market-linked accumulation. Income annuities are for converting a balance into a lifetime check. Variable annuities are for tax-deferred market exposure with optional guarantees. Matching the product to the goal is the single most important decision you make.
The fix: Name your goal in one sentence — "I want safe growth," "I want income I can't outlive," "I want protection with some upside" — before you look at a single product. Then read up on the categories at the education hub and compare real products by type in our reviews. Buying a fixed annuity when you wanted income, or an income annuity when you wanted liquidity, is a mismatch no rate can fix.
Mistake 2: Ignoring the surrender schedule
A 68-year-old puts $200,000 into a 10-year annuity, then needs $40,000 two years later for a roof and a medical bill. The contract only lets her take 10% a year penalty-free; the rest comes with a surrender charge of around 8%. That early withdrawal costs her thousands in penalties — money she never had to lose if she'd matched the contract term to her actual time horizon.
Surrender charges are the penalty for taking out more than your free-withdrawal allowance before the schedule expires. They typically start high (often 7–10%) and step down to zero over the surrender period. They exist for a reason, but they punish anyone who needs liquidity sooner than they expected.
The fix: Never commit money you might need during the surrender term. Read the full schedule — year by year — before signing, and keep an emergency cushion outside the annuity. Our explainer on surrender charges walks through how the step-down works and what the free-withdrawal provision actually covers.
Mistake 3: Overpaying for fees and riders you don't need
A buyer adds a guaranteed lifetime withdrawal benefit (a GLWB income rider) to a variable annuity "just in case," paying roughly 1% of the account every year. Ten years on, they never turned on the income, and the rider has quietly drained tens of thousands in fees from a balance that was supposed to grow. The rider was real protection — it just wasn't protection they used.
Riders are optional add-ons that cost an annual fee. Some are genuinely valuable for the right buyer; many are sold reflexively to people who'll never use them. Variable annuities in particular can stack mortality-and-expense charges, fund fees, and rider fees into a yearly drag that compounds against you.
The fix: Pay only for guarantees you'll actually use. If you don't need lifetime income, don't buy an income rider. If a salesperson can't explain in plain English what a rider does and what it costs per year, treat that as a no. Compare rider fees across products in our reviews, and read up on what income riders really buy you before you add one.
Mistake 4: Not shopping multiple carriers
Two retirees buy essentially the same 5-year fixed annuity in the same month. One takes the first offer an agent presents; the other compares a handful of carriers first and picks a rate half a percentage point higher. On $250,000 over five years, that gap is worth several thousand dollars — for an identical guarantee, same safety, same term. The only difference was shopping.
Annuity pricing varies a lot by carrier and even by state. The "best" rate today isn't from a brand you've heard of — it's whichever financially strong insurer is competing hardest for your premium this week. Taking the first quote almost guarantees you leave money on the table.
The fix: Always compare at least three to five carriers for the same product type and term before committing. Check live current rates and rates by carrier, and look at term-specific tables like 5-year and 7-year MYGAs. The shopping itself is free; skipping it is what costs you.
A few more that quietly add up
Beyond the big four, three smaller mistakes compound over time:
- Confusing illustrated returns with guaranteed ones. FIA and variable illustrations show hypothetical "what if" numbers. Ask which figures are contractually guaranteed and which are projections — they're rarely the same.
- Surrendering an old annuity instead of doing a 1035 exchange. Cashing out a contract to buy a better one can trigger a tax bill. A tax-free 1035 exchange often moves the money without that hit.
- Naming the wrong beneficiary — or none at all. An out-of-date beneficiary form can send your money somewhere you never intended and force it through probate. Review it at purchase and after any major life change.
Mistake, cost, and fix at a glance
| Mistake | What it can cost | The fix |
|---|---|---|
| Wrong product type for your goal | Years of underperformance or mismatched liquidity | Name your goal first, then match the annuity type |
| Ignoring the surrender schedule | 7–10% penalty on early withdrawals | Read the full schedule; only commit money you won't need |
| Unneeded fees and riders | ~1% a year in rider fees, compounding | Pay only for guarantees you'll actually use |
| Not shopping carriers | Several thousand on a lower rate for the same guarantee | Compare 3–5 carriers before signing |
| Illustrated vs. guaranteed returns | Disappointment and wrong expectations | Ask which numbers are contractually guaranteed |
| Surrendering instead of a 1035 exchange | An avoidable tax bill | Move funds via a tax-free 1035 exchange |
How to avoid all of them at once
The pattern behind every mistake on this list is the same: moving too fast and not comparing. You can sidestep all of them with one disciplined process.
- Write down your goal first. Safe growth, lifetime income, or protection with upside. One goal, one sentence. This alone prevents the wrong-product mistake.
- Match the type to the goal, not the rate to your eye. Use the education hub and the reviews to confirm the category fits before you look at any single product.
- Read the whole contract — especially the surrender schedule and every fee line. If something isn't in writing, it isn't a guarantee. Get the answers to your questions on paper.
- Shop at least three to five financially strong carriers for the same product and term. Live rate comparisons make this quick.
- Question every rider. Only pay for guarantees you'll genuinely use, and make the salesperson explain the annual cost out loud.
If you think you may already be in one of these situations — paying for things you don't use, stuck behind a surrender wall, or earning less than you should — that's a separate but fixable problem. Our guide on whether you're stuck in a bad annuity walks through how to tell and what your exit options are.
I think the honest takeaway is this: annuities aren't traps by nature, but they are unforgiving of inattention. The buyers who get burned almost never get burned by the product itself. They get burned by skipping the homework — and the homework here is cheap, while the mistakes are expensive.