Sure income for the very (very) long haul

(Money Magazine) -- We all want to live longer, but in cold financial terms, making it past your 80th birthday greatly increases the chances that you'll run through your retirement savings. One way to prevent this is to buy an immediate annuity, which gives you a guaranteed income for the rest of your life.

In general I'm a big fan of immediate annuities, but the fact is that most people are reluctant to annuitize any significant portion of their wealth. After all, once you put half of your assets into an immediate annuity, you can no longer tap those savings in an emergency. And if you die soon after buying the annuity, the payments will stop and you'll have given up much of your assets for a small benefit.

But a few insurers are now offering a twist on payout annuities that allows you to protect yourself against outliving your savings with less money up front. It's called an "advanced-life delayed annuity," or a longevity annuity for short.

Here's how it works. Instead of devoting, say, 50 percent of your assets to an immediate-payout annuity at age 60 or 65 and collecting income right away, you use a much smaller portion of your money - 10 percent or so - to buy a longevity annuity that doesn't begin paying out for at least 20 years.

Bear in mind, if you don't make it to the age at which the payments start, you and your heirs get nada. Insurers are counting on the fact that most people won't live to collect, so they are willing to promise you a substantial income in the future for a relatively small premium today.

To my mind the concept behind longevity annuities makes a lot of sense. In effect it's like buying a homeowners or health insurance policy that has a very large deductible. You're insuring yourself against a catastrophic risk you can't handle on your own - in this case, running out of money late in life - while holding your premium to a minimum.

You guarantee yourself an income to cover your spending late in retirement while leaving more of your savings available to you today (or available to your heirs if you die young). And you can comfortably spend down a greater portion of your savings earlier in retirement, knowing that those longevity annuity payments will eventually kick in.

If you want to insure against running out of money late in life, I think the longevity annuity gives you a bigger bang for your buck than any other type of annuity. But you must meet the following criteria:

You have enough saved so you can give up a portion of your assets for income that won't materialize for decades - and that you might never see. Otherwise, you could face some grim years until you start collecting the longevity annuity's payments.

You can purchase a longevity annuity with money from taxable accounts or a Roth IRA. That's because the IRS requires you to make annual withdrawals from a regular IRA after age 70 1/2; annuity payouts that don't start until very late in life might not fulfill that requirement.

If you're in the market for a longevity annuity, you'll need to decide at what age you want to begin taking payments. The older you are, the higher your payments will be, as the table at right shows, so you'll need to weigh that benefit against the possibility that you'll never see the money. Also, since the annual income can vary widely by insurer, request quotes from several companies. Most policies offer an option that pays a death benefit or refund, but you'll have to shell out more money for the same income. That would defeat the purpose of buying guaranteed income for the smallest premium. Skip it.

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