With thousands of people facing retirement each day, they are challenged with how to manage their income. Investing in bonds and living off income had been the common wisdom.However, with interest rates on most bonds at historic lows, they provide meagre income at best. Recent reports suggest that an allocation to equities, preferably dividend-paying can help. There are other income generating investments that can be considered part of the mix.Still in this investment climate, income alone might not meet retirement expenses. The challenge becomes how to ‘spend-down’ assets at a sustainable rate whilst obtaining some return to ward off the effects of inflation and to provide for a possible upside.Some people who can least afford any loss of principal have piled into bond funds. Woe is the day that inflation fears or interest rates begin to stir.What people are not told is that the market value of the bond funds will tank. It’s hard to speculate how fast this decline will occur, but it is likely the high quality lower interest bonds will be hit harder. This is because there is a lower interest income stream to help sustain the market value. Obviously, high yield/emerging market debt will have its own challenges.The point is, bond funds are not the place for retirees for the long-haul.A lot has been made about the current dividend yield on stocks being higher than current bond yields. Just for reference, current yield is the interest or dividend payments divided by the market price (YLD=PMT/MV).For stocks this is actually the reverse of the touted Price/Earnings ratio which is about 14 for US stocks. That would place dividend yield at 7.1 percent. Sounds good, but not all stocks pay dividends and the US will likely increase the tax on dividends next year, reducing the after-tax dividend rate to four percent.There are other sources of income to consider in retirement portfolios. These include trust preferred shares, Real Estate Investment Trusts (REITs), convertible bonds, Master Limited Partnerships (MLP), and the stopgap Treasury Inflation Protected securities (TIPs). Each has a role to play in a properly structure retirement income portfolio. The mix of each asset, including high quality bonds and dividend paying stocks, will need to be ‘optimised’ and continually rebalanced during retirement.The most important point to make here is that the core high quality bonds need to be ‘laddered’ not in a fund.What does laddered mean? This is where specific bonds and dividend stocks are purchased so that the income payments are planned to be received on a schedule during the year be they interest payments, maturing bond principal, or dividends. The income is planned to meet anticipated expenses.Because the individual bonds are laddered to payoff at a planned maturity date, the portfolio will not be subject to the whipsaw of market changes. With dividend income, particular stocks can be purchased so that dividends are paid in a particular quarter or month. This is determined and laddered at stock selection. Interestingly, the recent stock market pullback has made these stocks more appealing from a valuation standpoint.Even with a mix of higher income securities and laddering securities, there may not be sufficient income for an optimal life in retirement.The next significant step for someone living on a retirement portfolio is to consider the ‘spend down’. To some degree, it is the reverse of the accumulation stage that has been the focus of the financial world over the last 30-40 years. But it is vastly different in implementation. First priority is the careful calculation of the expenses in retirement.There are three broad categories: 1) essential expenses; 2) lifestyle expenses; and 3) gifting or estate transfer goals. These are considered in connection with the various income streams one has in retirement, ie social insurance, pension annuity payments, other investment accounts.According to the Investment Company Institute report on US retirement assets in as of Dec 2010, 25 percent of investable assets were outside of pension or retirement plans. In the US, another 26 percent were in individual retirement accounts (IRAs). Bermuda has not had the Occupational Pension Scheme in place for the same length of time as the US qualified 401k and other company sponsored plans. Likewise, there are no tax incentives for individuals to contribute to Bermuda Personal Retirement Products (PRPs). These primarily utilised for rolling over investments from previous employer pension plans. None-the-less, there are varying sources of income in retirement to match the different levels of spending needs.Because of this layering of income, the typical approach to calculating the ‘spend-down’ of investment assets needs to be revisited. The common knowledge had been to use a four percent withdrawal rate from the existing investment balance in order to protect the principal for passing onto beneficiaries, with six percent the target when planning to spend it during this lifetime. In a situation where there is also an annuity from a pension plan and income from social insurance, the withdrawal rate from the investment account might be increased to over seven percent. This is especially true if supported by a single deferred annuity for the very elder years. These withdrawal rates need to be determined based on individual circumstances, as part of an overall financial plan.In closing, retirement income planning is a specialised area in which few investment advisers are adroit. Typical investment wisdom may not pay-off. Beware the bond fund for long-term planning. Look to laddering specific assets and optimising a portfolio of other income producing assets. When in doubt, ask a specialist in retirement income. According to the Employee Benefits Research Institute (EBRI) 2010 Survey of Worker Attitudes Towards Retirement Savings Needs, only 21 percent of people had consulted an advisor.That same report noted that only 42 percent of individuals had even attempted to calculate the amount of assets they needed for retirement. Failing to plan is planning to fail.Patrice Horner is a Financial Consultant for IFP, an MBA in Finance, a FINRA Series 7 Licence, and a Certified Financial Planner (CFP-US). She is chair of the Americas Group of the Financial Planning Association Global Advisory Council. Information is from her recent presentation on Retirement Income Strategies. She may be contacted at phorner@ifp.bm or 297-4375. 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