Preserve Your Savings for Life

For example, a 65-year-old man who invests $100,000 in a traditional life-only annuity would receive $676 a month for the rest of his life, according to New York Life. (A woman's payout would be smaller because of her longer life expectancy.) If the man lives a long time, it's a great deal. But if he dies early, the insurance company keeps the money.

Or he could choose a life annuity with a cash refund so his heirs would receive the balance of his initial investment if he died prematurely. His monthly payout would decrease to $626. If he opted for a life annuity with a 20-year guarantee (meaning his heirs would continue to receive annuity payments for 20 years from the date of purchase if he died before then), his monthly payout would drop to $591.

These products have struck a chord with consumers, says Mike Gallo, New York Life's vice-president for retirement income. He says about 60% of customers are choosing either a cash refund or guaranteed 20-year payout option, compared with 10% who select a life-only annuity. "We've seen very significant growth in the last few years, but I think we've just scratched the surface," says Gallo.

Longevity insurance

Running out of money is rarely a big concern in the early years of retirement. To protect the oldest of the old, a few companies are offering annuities that act more like insurance. You set aside a small amount of money when you retire, or even earlier, and you collect your first checks when your reach a designated age.

For example, say you make a one-time $25,000 investment in Metropolitan Life's basic Retirement Income fixed-rate annuity at age 60 and select 85 as your annuity start date. If you are still alive at age 85, you'll receive $24,300 a year for the rest of your life. If you invest at age 55, you'll receive $38,000 a year starting at age 85.

But if you die before then, you don't get anything. If that gamble doesn't appeal to you, you can add a feature that pays a death benefit to your heirs if you die before the designated payout date. The death benefit would equal the amount you paid in plus 3% a year from the date of your investment. But adding a death benefit means smaller payouts to you if you live past 85. So if you start investing at age 60 and you die at age 85, your heirs will get $52,000. If you live beyond 85, you'll receive $16,400 a year, compared with the $24,300 you would have received if you had not signed up for the death benefit. To maintain the maximum income for yourself, you could buy a longevity insurance policy and a separate life-insurance policy to provide for your heirs.

A paycheck for life

How much annual income can a 65-year-old man who invests $100,000 expect? Here are the first-year figures from a variety of retirement-income sources, as well as the trade-offs between income and flexibility. The annuity payments listed here are fixed for life. Investment payouts could rise or fall with market performance.

Income SourceAmount per YearGuaranteed Income for Life?Control of AssetsLegacy for Heirs?4% initial withdrawal from portfolio$4,000NoYesMaybeFidelity Income Replacement 2036$5,090NoYesMaybeAnnuity with 20-year guaranteed payout*$7,091YesNoMaybeLife-only annuity$8,116YesNoNo*Guarantees payments for life and pays death benefits to heirs if you die within 20 years.Sources: Fidelity Investments, New York Life

The big picture

For now, it's up to you to assemble the pieces of your retirement-income puzzle. Your choices will depend on your age, health and sources of income.

If you receive Social Security and a pension, you may have all the guaranteed income you need to cover your fixed costs. You may want to add some money to a Fidelity income fund for discretionary expenses or to a Vanguard or Schwab payout fund if you’re more interested in growing your portfolio.

If you don't have a pension and you're concerned about outliving your savings, consider buying an immediate annuity to cover your fixed costs and pairing it with one of the new income funds to cover other expenses. You can compare annuity payout rates at www.immediateannuities.com. Because you'll want some liquidity for emergencies and other expenses, Ellen Rinaldi, of Vanguard, recommends that you don't spend more than 30% to 40% of your total assets on an immediate-payout annuity.