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When does buying an annuity make the most retirement planning sense?

A discussion of this issue is another nugget of retirement wisdom from Anna Rappaport, chair of the Committee on Post-Retirement Needs and Risk for the Society of Actuaries and key author of a new study on retirement security. The thing I like best about Rappaport's advice is its simplicity. No gobbledygook. Just straightforward wisdom anybody can understand.

Before you buy an annuity, Rappaport emphasizes taking these initial steps.

Set aside a robust emergency fund. No matter what your income level, you must have enough cash to cover your living expenses for at least a year or, better yet, two years before you lock up money in an annuity. The emergency fund will get you through minor emergencies and major ones, too.

Consider Social Security as an annuity replacement. Delaying claiming Social Security until you are at full retirement age or the maximum Social Security age of 70 will raise your benefit at least 8 percent a year, plus any cost-of-living adjustments. This is a more generous annuity than you can buy anywhere these days.

Pay off your mortgage. Eliminating this debt will in most cases reduce your cost of living significantly and give you greater cash flow.

Once you've taken these three steps, Rappaport outlines three good reasons for putting part of your retirement savings in an annuity.

• Dependable payments. Especially in the case of couples where one person handles all the money, an annuity will protect the other person, particularly if he outlives the money manager.
• Reduced longevity risk. You don't have to guess how long you'll live, and the money will last as long as you do.
• No mistakes. You can't blow through the money all at once. An annuity protects you against dementia and bad spending or investment decisions.