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The New Retirement Rulebook

There are also what Smith refers to as "joy expenses."

"If you take one person who may like golf, or maybe they ski, an individual's costs of goods and services that they purchase may go up [to a greater extent] than the next individual who may not do the same thing," Smith says. "These are the added extra things they are enjoying that they won't do forever, but for 10 to 15 years we have to make sure they have a really good income for that. We have found that using just a flat rate of 3% may work for most people, but not for others."

Smith doesn't advocate converting all savings into annuities, but having a baseline of income provides the ability to invest in other assets to help keep pace with inflation and future needs that go beyond basic living expenses.

"[For that second layer] we potentially use preferred stocks, nontraded REITs or a very conservative fixed-income portfolio," he says. "We are using a very conservative growth rate on those assets to be able to cover those additional joy expenses down the road once they retire, and then goal expenses as well. The idea is to have peace of mind and security on their income side then show them how to actually grow the assets on the rest of it."

Pete D'Arruda, president of Capital Financial Advisory Group, agrees that annuities -- he suggests fixed annuities with income riders -- can build a necessary foundation of income.

Living off a nest egg for 30 or more years is a challenge, so a level of certainty and peace of mind with investments goes a long way, he says. The objective is to have a foundation of safety that enables the rest of the portfolio to take on more risk while lessening worries of day-to-day market volatility.

"You have to have some money in a core approach where you can't lose it," he says. "If I can have a percentage of that in my clients' accounts, then I can afford to take some risk with what's left, because I know that if for some reason we have another 2008 or market catastrophe the only thing that's exposed to that risk would be that money, and the other assets continue to grow. The more money I can get in a safe place, the more risk my clients can take with what's left. People who never thought before that they could take risk are now able to after they have some safe money in place."

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