Annuities vs. HSA for Retirement Health Costs: What Comes First?

Healthcare is usually the retirement expense people plan for the least and end up paying the most for. Two very different financial tools often come up in that conversation: a Health Savings Account (HSA) and an annuity. They’re not competitors, and they’re not interchangeable. Understanding what each one actually does is the first step to figuring out which deserves your attention first.

Why This Question Comes Up at All

According to Fidelity Investments’ 2026 Retiree Health Care Cost Estimate, a 65-year-old retiring this year can expect to spend an average of about $185,500 on healthcare over the rest of retirement, and a married couple retiring together faces roughly $371,000 combined. That figure covers Medicare premiums, cost-sharing like deductibles and copays, and prescription drug costs. It does not include long-term care, and someone turning 65 today has a meaningful chance of needing some form of it.

Fidelity’s research also found that a majority of people nearing retirement assume Medicare will cover most or all of their healthcare costs. It generally doesn’t. That gap between expectation and reality is exactly why HSAs and annuities both come up in retirement planning conversations, even though they solve different parts of the problem.

What an HSA Actually Does

A Health Savings Account is a tax-advantaged account available to people enrolled in a qualifying high-deductible health plan. It’s often described as having a triple tax advantage: contributions reduce your taxable income going in, the balance grows tax-free, and withdrawals for qualified medical expenses come out tax-free too.

For 2026, the IRS contribution limit is $4,400 for individual coverage and $8,750 for family coverage, with an additional $1,000 catch-up contribution allowed once you turn 55. Unlike a Flexible Spending Account, HSA balances roll over every year with no use-it-or-lose-it deadline, and the account is yours even if you change employers or health plans later.

Here’s the part that matters most for retirement planning: after age 65, you can withdraw HSA funds for any reason, not just medical expenses, and you’ll only owe ordinary income tax on non-medical withdrawals, similar to a traditional IRA, with no penalty. Before 65, non-medical withdrawals generally trigger both income tax and a 20% penalty. HSA funds can also be used tax-free for Medicare Part B and Part D premiums and, within IRS limits, for qualified long-term care insurance premiums, though generally not for Medigap premiums. Because of this, many people treat an HSA less like a spending account and more like a dedicated retirement healthcare fund, paying smaller medical bills out of pocket while working and letting the account grow for later.

What an Annuity Actually Does

An annuity is a contract with an insurance company, not a savings account. You pay a lump sum or a series of payments, and in exchange, the insurer provides you with income, often structured as guaranteed payments for a set period or for the rest of your life, depending on the contract.

Annuities come in several forms, including fixed, indexed, and immediate or deferred versions, each with different guarantees, fees, and payout structures. Growth inside an annuity is generally tax-deferred, but withdrawals are typically taxed as ordinary income rather than the tax-free treatment an HSA offers for medical expenses. Some annuities include riders that can help offset long-term care costs specifically, which is worth asking about directly if that risk concerns you.

The core purpose of an annuity isn’t to fund medical expenses specifically. It’s to convert a lump sum into a predictable income stream you can’t outlive, which can then be used for any expense, including the recurring costs Medicare doesn’t fully cover, like Part B and Part D premiums, Medigap premiums, or ongoing prescription costs.

So Which Should Come First?

Financial professionals generally frame this less as an either-or choice and more as a sequencing question, and it’s worth understanding the general logic even though your specific order should be confirmed with a financial advisor familiar with your full picture.

The case for funding an HSA first, if you’re eligible: its tax treatment is difficult to match anywhere else. Money goes in, grows, and comes out tax-free for medical expenses, which happen to be one of the most predictable growing costs in retirement. If you’re currently enrolled in an HSA-eligible health plan and not maxing out your contribution, that’s often the first gap worth closing before considering other retirement income tools, simply because the tax advantage is so specific to healthcare costs and so hard to replicate elsewhere.

The case for an annuity, usually somewhat later: annuities are typically funded from an existing lump sum, such as a portion of a retirement account, an inheritance, or proceeds from selling a business or property, generally closer to or during retirement, when the priority shifts from accumulation toward converting savings into reliable income. An annuity doesn’t offer the same tax-free growth for medical costs that an HSA does, but it addresses a different risk entirely: the risk of outliving your money or facing a Medicare premium and drug cost obligation that continues for the rest of your life, regardless of market performance.

In practice, many people end up using both, an HSA built up over their working years specifically earmarked for medical costs, alongside an annuity that provides a baseline of guaranteed income to cover ongoing expenses like Medicare premiums. Whether that’s the right structure for you depends on your income, your existing retirement accounts, your health coverage today, and your overall risk tolerance, which is exactly the kind of question a CFP or tax professional should weigh in on directly.

Where Wilkerson Insurance Agency Fits In

To be direct about our role: we’re not financial planners, and we won’t tell you exactly how to split your savings between an HSA and an annuity. What we can help with is more specific. On the health insurance side, we can help you find an HSA-eligible high-deductible plan if that fits your situation, and once you’re on Medicare, help you understand what Medicare Supplement or Medicare Advantage options exist to manage the ongoing costs an HSA or annuity might eventually help cover. Our HSA Plans page covers how these accounts work in more detail, and our guide to maximizing your HSA for healthcare expenses and retirement goes deeper into contribution strategy.

On the annuity side, Wilkerson Insurance Agency works as an annuity broker, comparing fixed and indexed annuity products from multiple carriers to help match you with an accumulation or income option that fits your goals. Our Annuity Broker page has more detail on that process.

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