In the past two to three years, some of financial advisor Andy Aran's retired clients are drawing down 7 percent to 9 percent of their principal because there hasn't been much of a return in the market.

"Previously, older investors were withdrawing 4 percent a year in a 20-year time span, but now it's up to 9 percent in some cases because of limited resources and the principal earning less in terms of return and yield in the market," says Aran, who manages $103 million at Regency Wealth Management in Midland Park, N.J.

Total returns on U.S. stocks averaged only about 2.5 percent annually from year-end 2000 to year-end 2011, compared with a total return on bonds of 6 percent annually in the past 11 years, according to the Investment Company Institute.

"It's a recent phenomenon and not yet widespread, but the longer interest rates stay low, the bigger of an issue drawing down principal will become," Aran said.

While the focus of the 30- to 40-year-old investor may be accumulating investment returns, the 60- to 80-year-old decumulation client is typically concerned with generating income over a 20-year time span.

"We've noticed our financial advisor clients shift from accumulation to decumulation as their client base ages towards retirement. The decumulation trend is creating increased investment in income-oriented corporate bonds, high-yield and municipal bonds," said Stuart Parker president of Prudential Investments at the firm's mid-year outlook recently in Manhattan.

Some financial advisors are considering riskier investments such as immediate annuities, junk bonds and preferred stocks to secure income for their clients and to avoid drawing down principal.

With $200 million in assets under management in San Rafael, Calif., financial advisor Robert Margetic invests 5 percent to 10 percent of his client's portfolios in junk bonds that yield 6 percent to 8 percent annually.

"We invest in a high-yield ETF with 10 or 20 bond positions that have low management fees, which eliminates the need for us to investigate the company," said Margetic.


"We've been in junk bonds since 2009 and they're great performers. Unless the entire economy implodes, I think they are a fairly good buy," Margetic said. "The risk is that the issuer can default, which we assess beforehand."

Margetic favors defensive kinds of holdings, such as transportation and industrial companies.

"We stay away from high-end retail junk bonds because there's too much risk there. We look at solid companies with decent cash flow," said Margetic.

About 60 percent of Doug Goldstein's clients are near retirement, prompting the financial advisor to set up short- to medium-term bond ladders that are supplemented with higher-risk equities that pay dividends, such as preferred stock.

"Preferred stocks pay a higher dividend than regular stock depending on the quality of the underlying company that issued the stock," said Goldstein, whose financial advisory firm Profile Financial serves clients in Miami, New York and Jerusalem. "You'll get higher yield from preferred stock issued by banks, brokerages and insurance companies. The risk is when interest rates go up, the value of preferred stock decreases."

Before selecting preferred stock to invest in, Goldstein advises evaluating cash flow and earnings.

"Just because a preferred stock is in the S&P 500 doesn't mean it's going to be a success. I review the issuer of preferred stock in the same way as an issuer of a bond," Goldstein said.

A 70-year-old couple that invests a $100,000 lump sum in an immediate annuity generates payouts of 6.3 percent for fixed annuities, 6.7 percent for variable annuities and 4.7 percent for inflation-adjusted annuities offered through American General Life Insurance Company with an assumed investment return (AIR) of 3.5 percent, according to Vanguard data.

But Aran considers immediate annuities an expensive alternative. "There are different flavors in terms of vetted pricing, withdrawal requirements and restrictions," said Aran.

Emerging market debt is another higher-yielding product that financial advisors are choosing.

For example, Margetic invests 3 percent to 4 percent of his clients' portfolios in emerging market debt in Brazil and the Czech Republic that yields 5 percent to 7 percent with price appreciation over a two-year period.

"We've trimmed our investments in Russia, India and China, but we still think they are good bonds with less chances of defaulting than Spain or Greece. China is a wobbly wagon that's getting ready to veer off course," Margetic said.

-Juliette Fairley