Clients, many with more money than they ever imagined they’d have, suddenly are finding the road to retirement isn’t the cruise they signed up for. Few blame their advisors and even fewer are switching advisors. But the challenges of generating retirement income are playing out in difficult conversations with clients in ways that were unexpected a decade ago.

It shouldn’t surprise anyone that two 50% bear markets in a single decade would prompt everyone from academic thought leaders to advisors to reconsider sequence-of-returns risk as a more powerful threat to retirees than in the past. Throw in global near-zero-interest-rate policy for a longer period than anyone anticipated and the issue of asset allocation for retirees has become a question mark with few easy answers.

In the aftermath of the financial crisis, eminences like Nobel laureate William Sharpe, Barra co-founder Andrew Rudd and others voiced concerns that many ordinary Americans had been overexposed to equities. America’s entire retirement system was suspect. Time magazine devoted a cover story to why it was time to retire 401(k) plans, even though there was no plausible alternative apparent.

Perhaps the most radical study was conducted by Van Harlow, director of research for Putnam Investments, a widely respected thinker who had held the same position at Fidelity. Harlow’s study was astonishing. It concluded that the vast majority of Americans, excluding the ultra-affluent, should hold no more than 10% or 15% of their assets in equities.

When interviewed at the time, Harlow admitted that he was stunned by the conclusion his study produced. At the time he started the research, his presumption was that the optimal portfolio would look something like the traditional 60/40 portfolio many advisors and pension funds use. Asked if his results were skewed by the two bear markets in the previous decade, Harlow said he had tried to compensate for them and arrived at similar results.

One of the more intriguing attempts to address sequence-of-returns risk came from two of the profession’s bright young thinkers, the American College’s Wade Pfau and Michael Kitces of Pinnacle Advisors. They turned traditional thinking on its head and proposed that individuals enter retirement with a portfolio consisting of 70% bonds and 30% equities. 

Their reasoning was that clients could live off the income from bonds while letting the equities ride without rebalancing. If a person encountered a vicious bear market early in retirement, the effect on her purchasing power and overall net worth would be minimal.

Eight years after the financial crisis, the prolonged period of low interest rates has prompted advisors to question most of these approaches. At the time when they were conceived in the immediate post-crisis year, many assumed that the period of near-zero interest rate policy was temporary. Today, many financial professionals think that we could be in a long period of low interest rates. 

Rudd, now CEO of Advisor Software, acknowledges there are big changes people didn’t expect five years ago. Advisors aren’t using TIPS, the inflation-protection vehicles favored by many academics. “If you are going to live for a long time, then you have to be concerned about inflation. But TIPS are at such low interest rates, it is very costly to use them,” Rudd says.

Increasing equity exposure in expectation of a long lifetime could mean a smaller reduction in portfolio value over time for retirees. But clients choosing this option need to maintain a positive cushion to maintain sufficient assets to stay above the minimum amount where they have no other choice but to annuitize, Rudd says.

He advocates a liability-driven approach to portfolio management, with assets compartmentalized to provide for three different needs: necessary expenses, target expenses and aspirational goals. The further above the annuity curve clients move, the greater the risk and volatility they can take on as they focus more on aspirational goals.

But the overarching problem most clients are wrestling with is generating income in today’s low-interest-rate world. Mark Balasa, partner with Balasa Dinverno Foltz, says his firm has on-boarded lots of prospects over the last 18 months. Their biggest problem hasn’t been the way their previous advisors allocated assets.

Most of “the people who come in with problems are those who were reaching for income,” Balasa says. He has seen yield-starved prospects with pockets of concentrations in high-yield bonds, master limited partnerships and closed-end funds they bought at discounts only to watch that discount deepen.

Virtually none of their portfolios have matched a conservative, transparent, low-cost 60/40 portfolio, Balasa says. He acknowledges his firm doesn’t try to shoot the lights out and hasn’t over the last 18 months, believing the risk-reward trade-off in many asset classes isn’t there. “I get that things are pretty difficult,” he says.