The difference between Kelly and other retirees, who may be struggling in this low-return, low-interest environment? He lives within his means on investment income, without tapping into principal. As important, he decided to take the smart advice of one of the investment advisors we consulted for him before he retired and annuitized part of his retirement nest egg. The result? Kelly annuitized about 40% of his investments  ($400,000), while leaving the rest ($700,000) in a portfolio comprised of T. Rowe Price and Vanguard stock, bond and money market funds.

"If I hadn't annuitized, I would be off the wall at this point," Kelly says. "I'd have negative income. I'd be losing money."  Before retirement, Kelly was very concerned about how an annuity would impact what he could leave to his significant others. But pragmatism and persuasive advice won out and Kelly decided that partial annuitization-which guarantees that his monthly bills can be paid no matter what the stock and bond markets do-was his best bet. After all, Kelly still has his home, a $700,000 portfolio and two pieces of land to leave to his beneficiaries.

By annuitizing through his former employer's pension plan, Kelly is guaranteed monthly income, which has become his saving grace. He gets the cash he needs to live and doesn't have to dip into his portfolio's principal, which could lead him to run out of money down the road.

It was Mark Cortazzo, founder of Macro Consulting Group in Parsippany, N.J., who recommended that Kelly annuitize part of his portfolio as Kelly prepared to retire back in September 2006. Cortazzo warned then about the potential looming disaster of investing 100% of Kelly's portfolio in the stock market. "If I gave him the average large-cap-growth portfolio over the past five years and he was drawing down 6% annually, his million would be worth about $100,000 today," Cortazzo says. "If the bad years come first, it won't matter what the averages are."

With five-year CDs paying just shy of 3.5% and even 10-year Treasury yields below 4%, it's a hard-scrabble life for retirees depending on cash and bonds to generate retirement income. "This environment always kills those people determined to keep their money in CDs," says Darin Pope, senior vice president and chief investment officer of United Advisors in Secaucus, N.J.  "They literally find themselves riding down the slope of interest rates."

To offset that for clients, Pope says he uses intermediate and long-term corporate bond funds, which returned approximately 7% last year, and looks at immediate annuities, also paying around 7%. "The bond and guaranteed portions of our portfolios allow us to also invest in stocks, so clients are able to beat price increases and inflation going forward," says Pope.

The firm typically invests 50% to 60% of his retired clients' portfolio in bonds, but goes as high as 70% depending on client needs, Pope says. To quiet retirees' concerns, Pope has starting holding "market" conference calls to explain and give context to stock market declines and recessionary concerns. "We don't get a lot of clients who call our offices randomly, but we had 45 people on this call in the middle of a January afternoon, and that tells me people are interested."

Keeping investors comfortable is critical in this environment, says Bryan Place, president of Place Financial Advisors in Manlius, N.Y., who manages $110 million for 125 clients, about half of them retirees. "The fact that Kelly covered his fixed expenses through annuitization is critical, not only because it extends the longevity of his portfolio, but because it gives him psychological comfort. A guy like that is not selling into the market's weaknesses. It allows him to stay in the market when times are tough," says Place. To help investors and advisors get the most competitive quotes, Place spent the past year creating http://www.AnnuityQuickQuote.com, which launched earlier this year. The site gives users the top five insurance companies in order of payout rates and also provides a phone center staffed by CFP licensees should an advisor have a question. Place is seeing top rates come in between 7% and 8% from companies such as Mutual of Omaha, American National, Genworth, AIG and Metlife. Advisors who work on a fee-basis can waive commissions.

http://www.AnnuityQuickQuote.com is seeing tremendous interest from baby boomers, Place adds. "We're just at the earliest stages of their need for income planning, so I think it will just build and build from here."

There is another income option worth noting if investors have a paid-up life insurance policy. Instead of borrowing against their policy or cashing it in-options that leave investors with loan payments or without life insurance-Larry Fondren, president of Legacy Funding Group in Malvern, Pa., has created an innovative product that allows seniors 65 and older to take out a Legacy Loan. The product pays the policyholder the highest amount the life settlement market would provide but leaves the policy in place and pays all premiums-the policyholder never pays another dime. It works by charging the policyholder 9% interest. The face value of the policy is reduced according to a formula over many years, but the contract always leaves at least 10% in place for beneficiaries. "We think it's a great alternative," says Fondren. "You get to borrow against the policy, keep ownership, we pay all premiums and you get to capitalize on the arbitrage you'd otherwise be selling."