In a new report, the Employee Benefit Research Instituteexamines the effectiveness of immediate versus longevity annuitiesat reaching adequate retirement income targets.

Just as their name suggests, immediate annuities deliverregular, lifelong payments from an insurance company to the annuityholder that begin soon after signing the contract.

Longevity annuities, according tolongevityannuities.com, require the holder to wait until alater age before making periodic payments. It's recommended tobegin putting money into a longevity annuity long before retirement- the longer the period of time before payments begin, the lowerthe premium will be at time of purchase.

According to EBRI's research, either immediate or longevityannuities would be effective for reaching desired retirement incomeadequacy targets, especially for retirees with a lower income.

But long-term care, according to EBRI, is one factor that willdetermine how assets should be converted, whether using animmediate or longevity annuity.

If costs for long-term care are included in calculations forretirement income adequacy, no more than 80 percent to 90 percentof a retiree’s assets should be converted to an immediate annuity,with the balance reserved to cover long-term care costs. If alongevity annuity is used, retirement wealth should be splitbetween the annuity and equity (stock) investments to ensurelong-term care costs are covered.

The technical EBRI report is published in the May 2011 EBRIIssue Brief, online at www.ebri.org, and updates earliercomputer simulation analysis by EBRI on retirement income adequacy.It focuses on a male retiring at age 65, with specific assumptionson the long-term capital market and investment expenses, thelong-term inflation rate, and the mortality table.

Specifically, the report analyzes how differently immediate andlongevity annuities can affect probable income adequacy inretirement by taking into account long-term health careexpenditures. It attempts to find the optimal level ofannuitization and asset allocation that would provide a desiredlevel of confidence that individuals will have sufficientretirement income, based on three different types of risk:

1. Investment income (how much money retirement wealth is likelyto generate in retirement).
2. Longevity (how long the retiree expects to live inretirement).
3. Long-term care (how much is needed to cover nursing home orhome health care in retirement).