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.

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