Buying a longevity annuity is like buying a homeowner's or health insurance policy with 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.
For a typical retiree, putting 10% to 15% of retirement savings into a longevity annuity provides roughly the same spending power as devoting 50% to 60% of savings to an immediate annuity, according to a paper by Jason S. Scott, retirement research director for Financial Engines of Palo Alto, Calif.
