Why is there such a gap between what retirees want–a steady, guaranteed stream of income–and what they traditionally do with their retirement savings?

It’s a question that has puzzled academics, economists and others for years. But it’s one for which a solution appears to be emerging.

Retirees say they want a regular income check that will be there no matter what. In effect, they want the equivalent of a pension, a dependable source of income that is not subject to the vagaries of the market or other uncertainties.

Yet when it comes time to use the savings to purchase a guaranteed lifetime income annuity, they balk. One study, in fact, showed that only 4% of defined contribution plan participants who had an option to annuitize upon leaving the plan chose to do so.

Most retirees opt not to purchase an income annuity because they are concerned about losing control, flexibility and and/or liquidity. This, despite the fact that a 2007 Wharton Financial Institutions Center study (“Rational Decumulation”) concluded that annuitizing is not only effective, it’s efficient.

According to the study, income annuities can assure retirees of an income stream for life at a cost that is as much as 40% less than a traditional stock, bond and cash mix.

Instead, the majority of retirees and their advisors choose more common distribution strategies that involve either receipt of interest or dividends from certain investments (i.e., bank certificates of deposit or stocks) or systematic withdrawals from an investment account. The former may result in a reduction in lifestyle, while the latter may expose retirees to several risks, not the least of which is the risk of running out of money.

Now, a new approach is emerging which makes purchasing income annuities more palatable to retirees, even those before retirement age.

This process is called retirement income annuity laddering. Already up and running at one company and slated to become available through other distribution channels in 2008, it enables retirees to make incremental purchases of annuity income benefits with assets transferred from retirement savings over time.

It performs calculations, makes recommendations and enables planners to easily “re-plan” over time. However, it is also flexible enough to enable clients to accept the recommendations or choose other options due to personal circumstances.

Because it enables planners to replicate the process easily and often, they are able to manage many more clients than if they were to do this work without it and to do so with greater confidence.

Example: Assume that, within one rollover individual retirement account (offered as an investment advisory program), there are 4 mutual fund model portfolios, a unique income annuity that can accept multiple premiums, and an income planning and income management system. Using the income planning portion of the system, an advisor can help the client to determine:

a) How much and when to withdraw from the account.

b) How much to invest in a mutual fund model portfolio.

c) How much, if any, to use to purchase annuity income benefits.

The approach enables retirees to take small bites of the apple over time, a more appealing proposition than swallowing the apple whole.

Analysis of account holder response to this approach shows that people exhibit significantly different behaviors than are seen more traditionally. For example, account holders purchase income annuities frequently, ladder frequently, often purchase inflation protection, and invest their remaining savings in portfolios that are more aggressive than might be anticipated.

This suggests they feel comfortable taking on more investment risk when they have a guaranteed stream of lifetime income. (See chart.)

Those who choose to ladder benefit from additional advantages. Purchasing guaranteed income over time enables you to avoid trying to “time” the interest rate environment just right. Furthermore, you’re selling mutual fund shares over time, avoiding the need to cash out in a bad market.

This approach helps retirees finally match their goals to their actions. It also provides them with an efficient and effective way to secure a guaranteed source of income in retirement.

Jerome S. Golden is president of the Income Management Strategies Division of MassMutual, Springfield, Mass. His e-mail address is .