Healthcare costs are rising and are expected to keep on increasing in the years to come. It's only natural to want to ensure those expenses are covered in retirement.
A 65-year-old can expect to pay $172,500 in out-of-pocket medical expenses in their lifetime, according to a 2025 Fidelity Investments estimate. That's in addition to what Medicare covers, and doesn't account for a stint in a long-term care facility. Plus, with Medicare premiums rising and drug costs increasing, having enough money to cover your healthcare needs in retirement is more than peace of mind; it can mean survival.
That's why guaranteed income is becoming a popular buffer. It gives retirees peace of mind that their essential living and health costs are predictable.
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"Healthcare is an expense you often can't cut back on," says Douglas Ornstein, senior director of guided advice at TIAA Wealth Management. "If the market has a bad year, maybe you choose to go on a less expensive vacation or not take a vacation at all. You can't skip that knee or shoulder replacement. It's a non-negotiable expense that often grows with age."
Using annuities to cover healthcare expenses can make sense, but it's not for everyone. Understanding how they work, who they are for, and what you give up for peace of mind is important when deciding if guaranteeing income for your medical expenses is right for you.
What is an annuity?
An annuity is a contract with an insurance company designed to convert a portion of your savings into a regular stream of income, paid out monthly, quarterly or annually. During the accumulation phase, you fund the annuity with a lump sum or through periodic payments.
Depending on the type of annuity — such as fixed or variable — you can choose between predictable, guaranteed payments or growth tied to market performance. For many retirees, the main draw of a lifetime annuity is guaranteed income for life, making it a reliable way to cover recurring out-of-pocket healthcare costs.
Creating a stream of guaranteed income for your out-of-pocket expenses makes sense for retirees who:
-Have a gap between their fixed income and medical costs. If Social Security or pensions don't cover recurring expenses like Medicare premiums, supplemental plans and prescriptions, an annuity can cover the gap.
-Are risk-averse and afraid of market downturns. If you worry a market decline could deplete the savings you'll need for healthcare, locking in guaranteed income can provide peace of mind.
-You want a set-it-and-forget-it safety net. If you prefer predictable monthly payouts instead of determining when you withdraw money from your account, an annuity can make sense.
Creating a stream of guaranteed income for your out-of-pocket expenses doesn't make sense if:
-You need flexible access to your cash. Annuities lock up your money. Unless you purchase special protections, early or large withdrawals often come with steep surrender charges and tax penalties.
-You already have enough guaranteed income. If your pension and/orSocial Security cover your healthcare expenses, you don't need to tie your money up in an annuity.
-You want to maximize wealth for heirs. Annuities are built to fund your lifetime income, not to leave a big inheritance behind.
"If you're in a situation where you have just enough money to live on in retirement or not quite enough or a little bit more, which is the bulk of Americans, this protects you from longevity, inflation and healthcare costs," says Ornstein.
"If you are somebody who needs $1 million to retire and you have $8 million, this might not be the best way to pay for healthcare," he said.
How much should you annuitize?
Ornstein says that to determine how much to allocate toward an annuity, first add your fixed income sources — such as Social Security, pensions and passive income — and subtract your living expenses, including healthcare costs. The remaining difference represents the amount an annuity can help guarantee.
When it comes to selecting a healthcare annuity, options abound. The most common type of annuity is an income annuity. Layered on top of an income annuity are several different options that can be used for healthcare planning, says Shawn Plummer, CEO of The Annuity Expert. "These include long-term care annuities, Medicaid-compliant annuities, and annuities with guaranteed lifetime withdrawal benefits that include long-term care doublers," he says.
Some annuities include crisis waivers, which Plummer notes allow retirees to access more of their funds without surrender penalties for medical expenses.
"One of the biggest reasons to use an annuity for future healthcare expenses is that it can reduce the amount of personal savings needed to pay for care," says Plummer.
Be aware of the downsides
Peace of mind comes at a price. For starters, annuities lock up your cash, meaning you can't access it early without paying steep surrender charges and tax penalties. Then there's the upfront investment. Some specialized options, like hybrid long-term care annuities, can require $50,000 to $100,000 or more, which keeps many retirees from using them.
Ultimately, an annuity isn't a silver bullet. Before buying one for healthcare costs, consider how it fits into your broader plan — including your savings, health history, family longevity, and risk tolerance.
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