A longer life sounds great, doesn't it? But for many retirees staring at an all-too-fixed pool of retirement assets, the climb in U.S. life expectancies over the last 100 years could eventually hit like a ton of bricks.

That's because the longer you live, the better your chances of outliving your retirement income. And more people are living longer every year, according to retirement policy expert Jeffrey Brown, a professor at Harvard's Kennedy School of Government.

One solution: Buy a "life-only option" fixed-income annuity, guaranteeing a regular income for life. But Brown notes that many annuities offer little more than high fees and low returns. And inflation can erode their income. Using a modest inflation projection of 3%, spending power is cut by 45% in 20 years, he says.

KNOCKING ANNUITIES
Investors, too, baby boomers in particular, caught on some time ago to the drawbacks of fixed-income annuities. That's why, to lure a more investment-savvy generation, insurance and mutual fund companies introduced "variable" annuities (i.e., annuities linked to mutual funds). And that's why, as those investors near retirement and crave income-generating vehicles, the annuity industry is creating new products combining the assured payouts of fixed annuities while promising higher returns.

Variable annuities were intended as savings vehicles; they don't generate income (though you can remove money by request). So the industry's hope was that aging investors would shift their assets into fixed-income annuities. No such luck: Last year 1% of variable annuities were converted into fixed-income annuities. The reason: Fixed-income annuities are no longer attractive to a generation used to market returns. But the annuity industry won't give up this money without a fight.

Already being offered is the "variable immediate annuity," This income-oriented annuity lets you put part of your investment in an equity fund, which means income will vary with the market. (It's much like a normal variable annuity, except that it pays out regular income. The "immediate" in its name refers to the fact that an income stream is paid to the individual usually within a month of signing a contract.)

New products like this help counter arguments that an income-producing annuity can't keep pace with inflation.

NEW AND IMPROVED
But what about folks afraid of the bear market? Well, some new variable-income annuities guarantee a floor below which payments will not drop - usually 80% to 85% of your first payment. If your first payment is $800, and your guarantee is 80%, you can never receive a payment of less than $640 no matter how badly the market performs. But there's a cost - from 1% to 1.5% of your total assets - which, much like a mutual fund's expenses, is deducted from payments.

Another concern for investors is liquidity. Once you buy a life-only option annuity, the money is effectively removed from your control. You can't use it for emergencies (essentially, you've given it away in exchange for guaranteed lifetime payments.). And if you take out a life-only annuity, the insurance company keeps what's left when you die. But, says John McGuigan, assistant vice president of insurance products at T. Rowe Price, "The industry is addressing this, at least with shorter-term annuities (called 'non-life' options), with cash-out provisions that let you remove all or part of your remaining money. But I don't foresee this for life-only annuities, where we take on the lion's share of risk."

OPTIONS ABOUND
One other new wrinkle, says Mark Mackey, president of the National Association of Variable Annuities, is payment guarantees for heirs. If, say, you buy a 10-year annuity, and die in year two, your beneficiary gets the remainder.

Professor Brown sees all this as a move in the right direction, He is a proponent of keeping some assets in an income stream you can't outlive. But he cautions, "It should not be 0%, and it should not be 100%." How much is right for you depends on your assets, risk tolerance, age, and health, Brown says. But a healthy person, early in retirement, without investment income, should consider these new products - for income and, yes, a dash of growth.