After the S&P 500 lost 35% in 2000 and 38% in 2008, financial advisors have had to think twice about how they win their clients post-retirement income.

Usually that leads to talk about asset allocation. But more important than that are the sequence and volatility of market returns, says Jim Otar, a Thornhill, Ontario-based financial analyst and planner: Large losses early in the retirement withdrawal phase, many have learned the hard way, can dismantle even the best-planned asset-allocation strategies.

Otar's research on systematic withdrawal rates over 111 years from 1900 through 2010 suggests that clients need a stable source of income, besides Social Security, to limit the impact of a downturn. "As withdrawal rates increase and the portfolio life shortens, the importance of asset allocation diminishes and is replaced by the effect of inflation," Otar says.

Otar sought to determine how better management decisions might influence a portfolio, factoring in systematic withdrawals, the sequence and volatility of returns, inflation, rebalancing frequency, portfolio cost and the potential alpha-or returns in excess of the risk-free rate of Treasury bills.

When someone is taking systematic withdrawals from a portfolio, its total return is much more affected by how the market performs and how much prices swing from day to day, month to month and year to year. The results of Otar's research, assuming a 4% withdrawal rate, show that the sequence of returns and how much prices move up and down contribute 32% to the total return of a portfolio. Inflation can contribute 21%, asset allocation contributes just 20% and money management skills contribute 11%.

The challenge to advisors, the research suggests, is how to plan and invest clients' assets so they have the income to maintain lifestyles and leave an estate to loved ones. Some say you need to anchor your clients' portfolios with insurance, like an immediate annuity, a lifetime withdrawal benefit or a deferred immediate annuity that pays guaranteed income later on in life. Others argue that systematic withdrawals from retirement savings investments will do the trick.

For example, research by Wade Pfau, an associate professor at the National Graduate Institute for Policy Studies in Tokyo, found that in 56 rolling 30-year periods from 1926 through 2009, an annual systematic withdrawal plan from a mix of 65% stocks and 35% bonds succeeded over any of the rolling periods. But for systematic withdrawals to work, retirees must avoid overspending during the first 10 years of retirement and they must keep investment expenses and taxes to a minimum.

Others believe you can't count on drawdowns. Peng Zhou, Ph.D., an actuary with Sun Life Financial in Wellesley Hills, Mass., conducted a study in 2003 at the University of Connecticut and found that the goal of income and estate preservation is achieved by setting up an optimal portfolio based on risk, return and the probability the money doesn't run short during retirement. In a paper Zhou presented to the Society of Actuaries, he wrote that financial advisors should consider several types of insurance products for a retirement plan. The plan should include investments in stock funds, immediate annuities and deferred income annuities, which allow the policyholder to pay regular premiums and receive income later in life. In addition, he recommends long-term care insurance and a declining one-year term insurance policy so that the retiree can cover any gap in estate value in the event he or she dies early.

"A well-crafted investment and immediate annuity strategy can create both longevity risk protection and greater estate value than a pure investment strategy," he says. "Estate value preservation and longevity risk protection can both be accomplished using immediate annuities."

His University of Connecticut study, Stochastic Modeling of Post-Retirement Financial Planning, shows how mutual funds and insurance can work together to limit investment risk and preserve an estate's value. Zhou assumed that a fixed immediate annuity would pay out 4%. Variable immediate annuities, as well as mutual funds earned a 5% annual rate. He then factored in taxes. He assumed that the risk of ruin occurred when a client's mutual fund investments dropped below the required estate value at death.

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