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.