The old ways of generating income in retirement are out the window, according to David Scranton, founder of Sound Income Group, an RIA and money management firm based in Fort Lauderdale, Fla.

In the past, many advisors likely told clients they could withdraw 4% a year from their portfolios and that they “probably” wouldn’t run out of money. Alternatively, advisors set up buckets of cash that clients could spend down without tapping out. Again, that meant “probably.”

But when the consequences are so severe—running out of money before you run out of life—these techniques are not good enough, Scranton says. “For one thing, nobody can agree on what a safe withdrawal rate is. Is it 4% or 3%? If there is an 85% chance you will not run out of money, or a 90% chance, that means there is a 15% or a 10% chance that you will run out.

“The only safe strategy is to generate real income, and to do that you have to continue to invest for growth, even in retirement,” he adds.

For the first time in a decade and a half, bonds are back in fashion. Alternatives such as real estate and REITs also can play a part. “These resources worked to generate income for us in the bowels of the stagnant interest rate environment, so they will continue to work now,” Scranton says. Sound Income Group is generating 4% growth for its clients’ portfolios after fees, he says. Clients who are not spending down their principal but instead generating growth will not run out of money.

Aaron Hodari, chief investment officer of Schechter Wealth, a financial services firm based in Birmingham, Mich., agrees that dividing assets into buckets is impractical. “Assigning particular assets to particular expenses can create a misalignment,” he says. Instead, advisors should look at a client’s entire portfolio.

Hodari says investors often fail to calculate the inflation rate, and if they concentrate on stocks that pay dividends they will be missing some necessary diversification.

“The 5% return you get today is going to buy less in 20 years, so you still need growth in a portfolio,” he says. “Shifting all stocks to ones paying dividends when you retire would be wrong. Instead, investors need to be fully invested across dividend and growth stocks.” Even asset classes like high-yield private debt, which may generate 9% to 12% returns, have a place in a portfolio, he adds, though these carry some risk.

Hodari agrees that real estate can be attractive, and suggests a mix of REITs and private property for a portion of client portfolios. “In our opinion, stabilized, multifamily developments are the way to go. This generates cash flow over market cycles,” he says. “Retirement is a journey that requires planning for longevity.”

Technology and product innovation have made alternative assets available to more investors, when they were previously limited to only the very wealthy. As these assets become more accessible, retail investors are able to do things like generate quarterly liquidity from offerings such as private debt. But such investments have to be looked at long before retirement. Only long-term planning can tell an advisor where their client is heading. If they know their clients won’t be spending down the assets over their lifetimes, then the advisors can start considering legacy planning as well. “Even a 90-year-old may want to invest some assets aggressively to benefit the heirs,” Hodari says.

In recent years, investors have been able to use another relatively new technique to generate income before and after they retire: direct indexing, which allows them to customize their portfolios by buying up the individual stocks from an index instead of buying the entire index outright. This technique, which lets them choose from a universe of international and domestic securities, also allows them to offset gains with losses and therefore reap tax benefits and daily liquidity, something they couldn’t do with the index by itself.

Direct indexing requires multiple transactions, but technology now allows retail investors to do it automatically to customize portfolios to their needs and goals.

Monali Vora, the global head of quantitative equity solutions at Goldman Sachs, prefers to describe this activity as “direct investing.”

“Direct investing delivers market-like returns but the portfolio can be customized,” she says. “This strategy is appropriate for those who have capital gains and who want diversity. It is not for everyone.”

Reasons To Adjust
Not everybody wants added retirement income, according to Lena Haas, head of wealth management advice and solutions at Edward Jones. But some clients might have other reasons to adjust their portfolios.

“Some near-retirees postpone retirement and keep working, others decide to work part time or start a second career,” says Haas. Edward Jones and Age Wave released a report on the subject in May, called “Resilient Choices: Trade-Offs, Adjustments and Course Corrections to Thrive in Retirement.”

Haas says retirees can have the best plans, but then things come up that throw those plans off.

“The biggest derailer that can require rethinking plans for income is the loss of a spouse,” Haas says. “Women are generally less prepared for retirement because they took time off for family or earned less, but they also are more willing to adapt their plans.”

Haas has a client who was 50 years old and getting divorced when she realized she was not prepared for retirement. “She found a better-paying job, found a roommate and began saving more. She also took on a side gig that she enjoyed and built her retirement accounts from $237,000 to $900,000, and the side gig put her over the $1 million mark. She was able to change and adapt.”

Haas also works with a married couple, both of whom are age 62. They delayed retirement until age 67 so they could let their Social Security benefits grow. They will receive an additional income from Social Security alone of more than $350,000.

Haas says that surveys show older people are actually happier than younger ones because they are better prepared for retirement. “Contrary to what most think, young people are not having all the fun. To properly prepare clients, advisors have to get to know the person well, not just the investments.”

Which is not to say everyone is equally prepared. Take people who own land or farms, for instance. They must often transfer property to the next generation while still getting ready for their own long retirement … and perhaps pay for things like travel, children’s weddings and grandchildren’s college along the way.

“Farmers are usually land rich but cash poor, which presents challenges,” says Les Williams, wealth strategist at RBC Wealth Management’s U.S. business. “These are often the least prepared people for retirement because they have been pouring the profits back into the farm. Farms are typically multigenerational assets. The retiring generation sees the farm as part of their retirement plan, at the same time that the second or third generation has to generate an income for themselves.”

The younger generation may want to buy the property, but they probably do not have the millions of dollars it might take to do that. Life insurance strategies can be used to solve some of these issues. In addition, land conservation programs can sometimes be used to provide income so that the landowners will not be forced to sell to a developer, Williams says.

“Working out these specialized potential conflicts takes an advisor with knowledge of the industry and empathy for the client,” Williams says.

The key to success for both generations is to plan early and have in-depth discussions with family members about what is expected of everyone, says Carol Goetsch, senior product manager at RBC Wealth Management. “The advisor has to determine what the cash needs of the retiring generation will be and how to maximize Social Security benefits, assuming they have paid into the Social Security system.”

Some companies have developed innovative products and services to boost clients’ retirement preparedness. For instance, RetireOne, an insurance product provider, has collaborated with Pension & Wealth Management Advisors, a registered investment advisor in Waltham, Mass., on a strategy called the Pension & Wealth Management Advisors’ Portfolio Income Insurance Program. The product is a model portfolio that comes in the wrapper of a contingent deferred annuity. It provides downside protection, but the company says it’s also unlike an annuity because the portfolio does not come under the administration of an insurance company.

“If you have a risk-averse client, staying in cash may provide peace of mind, but it will ultimately disadvantage them over time,” says George P. Webb, CEO of Pension & Wealth Management Advisors. “By setting a floor of income with the contingent deferred annuity, we have an innovative tool for boosting clients’ confidence and getting them out of cash. Further, we can transfer market risk in their portfolios to an insurance company without moving the asset.”