Your retirement savings can do one of three things: 1) they can go up, 2) they can stay the same, or 3) they can go down. If you could get rid of any one of these outcomes, which one would it be?

You have spent your life saving and investing for retirement. You've used every tax-advantaged savings strategy known to man, and you've built a tidy nest egg. But building a nest egg is only half of the equation. The other half is managing the nest egg during the distribution phase, when it is your goal is to use your assets in such a way that you don't run out of money before you run out of time.

Unless you know that you've got some terminal disease or are certain that you're genetically programmed for a short life, your assets will have to last 25 to 35 years, and possibly more, after you retire. There are a lot of variables to consider, and things can get complicated in a hurry. But, the distribution phase is entirely manageable if adopt a distribution strategy that uses the right financial instruments. Does the term asset allocation ring a bell? It's the same principle that you have been hearing all your adult life, but now there's an additional asset class that you must consider: Annuities.

Annuities are a financial instrument that can virtually ensure that you'll always have money coming in no matter how long you live. Annuities, plain and simply stated, are effective tools for converting assets into income. Basically, they work like a life insurance policy in reverse: You give the insurer a lump sum of cash in return for regular income payments until you die or for a specific period.

What type of Annuity?

The fixed-index annuity, a recent innovation in the insurance industry, is a form of a fixed annuity contract where the interest rate paid is tied to the performance of a stock index (e.g., the S&P 500 Index). This provides the annuity owner with the opportunity to earn returns better than those in a traditional fixed annuity. The owner is able to participate to a degree in stock market gains during a rising market, and when stocks fall the contract guarantees the principal. Because of that guarantee, the fixed-index annuity has virtually no downward volatility.

How much should you consider investing in one or more annuities to create a lifetime income?

There is no easy rule of thumb. It probably doesn't make sense to annuitize all your assets, since that would not follow the rules of prudent asset allocation investment, and it might limit your flexibility for dealing with unanticipated financial demands. You also may not need* an annuity at all if you've accumulated so much wealth that the chances that you'd run out of money are minuscule. Beyond these two extremes, however, the greater you feel your chances are of living a long life and the more concerned that you are that you might outlive your assets, the more of your retirement nest egg you should devote to annuities.

One approach to deciding how much is to try to cover as many of your essential living expenses (the cost of food, clothing, housing, medical care and so on) as possible with payments from regular sources of income such as Social Security, company pensions and annuities, and then rely on withdrawals from the rest of your portfolio to fund discretionary spending and emergency expenses. All in all, I think it would be reasonable for most people who need the stability of a reliable lifetime income to devote in the neighborhood of 25 percent to 50 percent of their retirement assets to annuities.

Another major issue you must address is which assets to annuitize: the pretax money in accounts such as 401(k)s and IRA rollovers, or investments in taxable accounts. There are tax arguments to be made for both. But when it comes time to retire, most of us will probably have the bulk of our retirement savings in tax-deferred accounts like 401(k)s and IRAs. Still, if you have substantial assets in both taxable and tax-deferred accounts, you might consider having your Annuity Advisor crunch the numbers both ways.

* You may still want to consider an annuity, even in this case, because of their special characteristics for passing on wealth to heirs.