As of 2005, U.S. individuals had an estimated $7.4 trillion invested in IRAs and
employer-sponsored retirement accounts. Many retirees will thus face the
difficult problem of turning a pool of assets into a stream of retirement
income. Purchasing an immediate annuity is a common recommendation for retirees
trying to maximize retirement spending. The vast majority of retirees, however,
are unwilling to annuitize all their assets. This research demonstrates that a
“longevity annuity,” which is distinct from an immediate annuity in
that payouts begin late in retirement, is optimal for retirees unwilling to
fully annuitize. For a typical retiree, allocating 10–15 percent of wealth
to a longevity annuity creates spending benefits comparable to an allocation to
an immediate annuity of 60 percent or more.