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

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

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

Specifically, the report analyzes how differently immediate and longevity annuities can affect probable income adequacy in retirement by taking into account long-term health care expenditures. It attempts to find the optimal level of annuitization and asset allocation that would provide a desired level of confidence that individuals will have sufficient retirement income, based on three different types of risk:

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