For decades now, the conventional wisdom was that retirees could withdraw about 4% of their assets every year without depleting principal. Yet with today's rock-bottom interest rates, a rising tide of early retirees and longer life expectancies, is 4% realistic anymore?

"The low current bond yields represent a clear challenge to the sustainability of 4% for recent retirees," notes Wade D. Pfau, director of macroeconomic policy at the National Graduate Institute for Policy Studies in Tokyo. "Retirement income strategies must be much broader than finding a sustainable withdrawal rate."

So what sort of distribution disciplines should financial advisors be recommending to retiree clients in the current environment?

Working With A Baseline
To be sure, many advisors have not completely abandoned the 4% solution. "I do make clients aware of it, but only as a general guideline," says A.J. Sohn of Antaeus Wealth Advisors in Boxborough, Mass. "You have to give people a baseline, and then you can work around it. So we build a customized plan for each client, because everybody's situation is different."

Sohn cites such differences as risk tolerance, long- and short-term objectives, lifestyle choices and financial resources. In other words, creating a customized withdrawal strategy is much like building any other financial plan.

"The withdrawal strategy is not something people should just apply and assume is going to work for them under all conditions," says William Bengen, president of Bengen Financial Services in Chula Vista and La Quinta, Calif., the man often credited with developing the 4% rule in the first place. The rule, he says, "assumes all your expenses and income will, over time, increase with inflation."

That's not always the case, however. So to offset inflation, Bengen suggests that a retiree might "start out with a lower withdrawal rate early in retirement and take out a higher rate later ... just to maintain his or her lifestyle."

Lifestyle discussions must be tempered with practicality, of course. "The paradigm has shifted to a more conservative needs-based withdrawal, with a concentration on preservation of principal, protection beyond inflation and, finally, profit of the overall portfolio," says Kimberly Foss, CEO of Empyrion Wealth Management in Sacramento, Calif.

Don't Retire Too Early
Many retirees, faced with the reality of a potential shortfall in meeting their needs, are forced to postpone retirement. After all, the longer they work the more they can save. And the shorter their retirement, the easier it is to preserve principal.

Yet those who try (or are pushed) to retire early-that is, before age 59½-face additional hurdles. The only way they can avoid the 10% penalty on early distributions from an IRA is to adhere to strict limits under IRS rule 72(t). These limits prevent young retirees from spending anything near 4% of their assets. "Early retirees can't withdraw enough to live on," cautions J. Graydon Coghlan, CEO of CFG Wealth Management, headquartered in San Diego. "The current withdrawal rate allowed under 72(t) is only about 1.3%," he says, noting that it changes daily.

Flexibility
For retirees over 59½, many advisors reject the idea of a withdrawal rule of any arbitrary size. "Applying any 'rule' can work in reverse of good planning," says Michael Kay, president of Financial Focus in Livingston, N.J. "A client's resources, risk tolerance and willingness to create a lifestyle that is synchronous with those resources obviate the need to overlay a theoretical rule."

A good strategy, adds Kay, requires built-in flexibility. "One client I knew began with a particular withdrawal rate, [but] the rate changed substantially when she moved in with her daughter and her family," Kay says. "She no longer had significant housing expenses. We had to revise her plan."

Indeed, withdrawal strategies should be re-examined regularly and after unforeseen trouble. "It's like taking a trip to Mars-you're not going to point your rocket ship and expect to land right where you aimed," says Bengen. "You'll probably have some midpoint corrections. Well, people's health can change, their finances change, maybe they'll inherit money or have a big loss in, say, a lawsuit. ... Even if not, every couple of years you should sit down with your clients and make sure their retirement plans are on track. I do it annually."

Tax-Deferred Annuities
Another potential problem with the old 4% rule is it's based on a tax-deferred portfolio. If your client's assets aren't in a tax-deferred account, he or she will have to pay taxes on not only withdrawals but reinvested dividends, interest and capital gains-further draining principal. "Tax deferral is one of the most important solutions for generating added returns," says Laurence Greenberg, president of Louisville, Ky.-based Jefferson National.

Greenberg recommends tax-deferred variable annuities as a low-risk way to guarantee income flow. Annuities may be most sensible for the first few years of retirement, to protect a portion of assets. Other assets can be invested more aggressively to appreciate over the long run.

"If you plan to be in the business for the next 10 years, and you want to help somebody retire every year, it could well be right before a bad spell in the market," says Zachary Parker, first vice president of income distribution at Securities America in Omaha, Neb.

Timing May Be Everything
To illustrate his point, Parker tells a cautionary tale about an acquaintance who retired with $1.7 million in 2007. Five years later, only $750,000 was left. "All the assets fell when the market dropped, and money kept coming out of those depressed assets," he recalls. "If the account had been set up initially in a way where the first five years was in some type of fixed account and the other assets were allowed to fluctuate, it would have contained the downside risk and he would've had a much better chance to recover."

Parker advocates what he calls a "time-segmented allocation model" that spreads a client's assets over different accounts, each designated to generate income over a specific time period. "So it effectively locks in some income for the first few years, with conservative fixed-rate or guaranteed products that don't fluctuate," he says. "Anything that's tied to the market with a lot of fluctuation goes later in the plan."

Clearly, dividing assets into separate investment vehicles allows retirees to draw on different types of funds at different times and for different needs. "Creating a retirement income plan utilizing a withdrawal rate for discretionary spending can be helped by segmenting [clients'] retirement assets by time usage," says Kristen Fricks-Roman, a senior vice president at Morgan Stanley Wealth Management in Atlanta. "For instance, Segment 1 would be for those assets to be utilized during the first five years of retirement and consist of liquid and laddered fixed-income investments. Segment 4 would be for those assets to be utilized 20 years from now and may be primarily invested in the market."

She adds that it's also a good idea to set aside emergency funds for unforeseen expenditures.

Chasing Yield
To generate adequate returns so retirees can withdraw what they need, some advisors go to extraordinary lengths in their pursuit of higher yields, even if that means higher risk. "Retirees in today's environment likely have to accept a modest degree of risk over the short term," says Sammy Azzouz, managing director of family wealth management at Manning & Napier in Rochester, N.Y. This may include securities with credit risk and duration risk, he says. Or income-producing equities such as dividend-paying stocks and REITs.

Curiously, a recent study found that tech stocks have become the second-largest dividend payers in the S&P 500 (in dollar terms), accounting for nearly 14% of all payouts last year, double what they were just five years ago. Still, such strategies require careful balance. The best solution, says Pfau, of the National Graduate Institute for Policy Studies, "depends on how one views the trade-off between downside protection and upside potential, as well as concerns about leaving a legacy."

Diversification
When venturing into higher-risk securities, it's important to diversify in order to smooth the bumps of market volatility. "This strategy entails splitting portfolios into different buckets, based on conservative to high risk," says Jill Schneider of MayerMeinberg in Syosset N.Y. "This gives retirees more control over where their money is coming from in any given year, and it allows them to make adjustments should their needs change."

Some asset managers employ sophisticated hedging strategies for their retiree clients. "We don't stick with a traditional stock and bond portfolio to generate steady income," says Michael McClary, vice president and chief investment officer at ValMark Advisers in Akron, Ohio. "I run primarily ETF managed portfolios," he says.

He also uses index-based futures for hedging purposes. "It really works well when you're taking withdrawals, because it smoothes out results," he says.

Others trade high-yield bond funds to produce a steady income stream. Stephen Blumenthal, founder and CEO of CMG Capital Management Group in King of Prussia, Pa., has designed a strategy of buying "at the higher yields, and then, when yields move lower, we take out the cash," he explains.

High-yield bonds, of course, carry a higher degree of risk than their better-rated counterparts, but they also pay out a great deal more. Because it can be risky, though, Blumenthal doesn't recommend this strategy for a client's entire portfolio. Only perhaps as much as a third of assets could be traded this way-while the rest is split between growth stocks and more conservative bonds, he says.