Because of low interest rates, many American retirees are either reducing withdrawals from investments or are taking out way too much, says Hearts & Wallet's annual report of U.S. household finances.

Hearts & Wallets executives say more retiree households are withdrawing less from personal assets or are taking out so much that they are eating into capital. Many retirees have reduced portfolio withdrawals from 4 percent to 3 percent, they add, while others are taking unsustainable 9 percent withdrawals.

With retirees taking out less money from accounts and interest rates expected to stay low for some time, some firms may want to change the definition of the retirement income market from 4 percent annual withdrawals of investable assets to 3 percent, says Laura Varas, a founder of Hearts & Wallets, based in Hingham, Mass. At the end of 2011, U.S. households controlled $31.9 trillion in investable assets, including money in retirement, bank, brokerage and annuity accounts.

Hearts & Wallets co-founder Chris Brown added that low interest rates may be the biggest reason more retiree households are not crossing the 4 percent withdrawal threshold and instead are cutting back on spending and making do with less.

Hearts & Wallets estimates are based upon the financial picture of retirees without traditional pensions. The two main income sources for these retirees are Social Security and income drawn from personal assets. "So when you see a big drop in the number of those households that are drawing at 4 percent or more, that means an immediate drop in their standard of living," Varas says.

Middle and lower-middle wealth groups are impacted most by depressed interest rates. These are less affluent retiree households that generate essentially little to no annual revenue and need to draw more heavily upon their personal assets to live, Hearts & Wallets says.

"They're either not able to take any income [from their personal assets] at all and their standard of living is hurt. Or, they're eating into their capital at 9 percent or more, which is unsustainable over the long run,"she says.

Meanwhile, many wealthier retiree households also are reducing withdrawals but aren't digging into principal, Varas says. "Retiree households with say $2 million plus, 22 percent of them are taking virtually no income and zero percent are taking 9 percent or more."

As a result of reduced withdrawals, Hearts & Wallets downwardly revised its estimate of the overall retirement income market in 2020 to be between 14 to 24 percent of all U.S. household investable assets compared with its 20 to 30 percent projection it offered last year.

The findings are part of Hearts & Wallets' "Portrait of U.S. Household Wealth: Market Sizing, Segmentation and Product Ownership by Age, Assets, Lifestage and Behavioral Segment" analysis that taps into data from more than 5,400 U.S. households and ongoing qualitative research.

-Jim McConville