Retirees seeking current income need to be careful to not get caught up in the short-term need for income, says Larry Stein, president of Disciplined Investment Management.

Instead, they should stick with a long-term, total-return approach. "Interest rates have increased, but probably not enough for most investors to generate the income needed to fund a retirement unless your portfolio is north of $10 million," says Stein.

Therefore, he continues to recommend a total-return approach, in which you invest in an asset allocation of low-cost ETFs that fit your time horizon, risk tolerance and return objective. "You could reach into high-yield bonds or high-dividend stock funds, but the income amounts are still not attractive enough, and you may become overly vulnerable to market declines," says Stein. "After all, even though earnings are rising, stocks are at relatively high valuations and could be vulnerable to further market declines."

Stein says some of his clients find greater peace of mind when their funds are split into two portfolios:
-- a more stable, lower-risk asset allocation (such as 30% equity and 70% fixed-income) to manage shorter-term cash withdrawals, and
-- a long-term portfolio with greater equity (such as 70% equity and 30% fixed-income) to drive growth.

"If the market falls, we rebalance by pulling cash from the lower-risk allocation," he says. "If the market rises, we rebalance by pulling cash from the higher-risk portfolio. To give our clients comfort, we generally keep the lower-risk portfolio equal to about five years of portfolio withdrawals."

The bottom line for Stein: "Don't let income needs pull you away from sensible investing. Stick with a total return approach that will generate income for you over the long term."