For many years, financial professionals provided advice on two of the three phases of retirement planning: contributions and accumulations. As a good friend describes, “They showed people how to climb Mt. Everest, not how to get back down.”

The third phase is distribution. Retirement income planning is the distribution process.

The biggest concern among clients about retirement distribution is having their account balance go to zero before their blood pressure drops to zero. To avoid this adverse outcome, many experts make the following suggestions:

Work longer: Clients who retire later will have more years to contribute and accumulate their retirement nest eggs. They will also have fewer retirement years. This idea certainly works–if the advisor can get clients to cooperate.

Withdraw less: This also works, but how to explain to clients that they have to sacrifice their standard of living? Many studies show that taking only 4% withdrawals will allow most portfolios to continue. However, what will the retiree not be able to do during retirement due to a lower withdrawal rate?

Contribute more: Also a good idea. But getting clients to set aside dollars for retirement in lieu of double mocha lattes is a difficult task. What do they want to give up now for satisfaction later? Delayed satisfaction is a tough sell.

Kidding aside, part of a financial advisor’s responsibility is helping clients set priorities. Americans need to save more and put less on credit. Just a few generations ago, banks would offer vacation clubs; depositors didn’t take the trip until they could afford it. What an archaic concept! Today, people even pay for college on credit, creating a generation of up to six-digit debtors before the graduates ever start their independent lives.

Accumulate more: Obviously, this is a good idea, but given the current economy, most clients are spending more time recovering what was lost than adding more.

So, what has been working? Life insurance cash value, in whole life and universal life, continues to increase once death benefit costs are covered. Variable life has not been so fortunate.

Variable annuities, with appropriate lifetime benefit riders, increase the income base. If a client contributes $100,000 to a variable annuity that experiences a 30% decline in investment account value, the fair market value drops to $70,000. However, with a 6% guaranteed minimum income benefit rider attached, the annuity rises in value to $106,000.

This is an interesting time to go back to advisors who told clients that cash value life insurance and annuities cause cancer. Ask them how they feel about these assets now.

What can clients do to recover from a drop in asset values? Depending on the time horizon, they can simply stay the course. This does not mean “Do nothing,” however. Staying the course means continue to rebalance the portfolio consistent with the client’s risk tolerance and time horizon.

Clients need to continue funding their retirement accounts. If the market is down 30%, that means quality purchases can be made on sale at 30% off. However, as with many sales, not everything that is on sale is, in fact, a quality purchase. Hence, the importance of carrying out due diligence when making selections.

Clients who are close to retirement (or already retired) and thought they were in safer investments need to look at other, less traditional approaches. While not advocating any of the following, I think these approaches should be considered.

? Take out a home equity loan: The equity value of a client’s home can be turned into retirement income. The client can take a home equity line of credit to get through tough times (with a plan to repay the loan if and when the market rebounds). This may be better than turning a “paper loss” into a real loss. A home equity loan also allows the client to hold onto currently under-performing assets.

? Take out a conventional mortgage: The funds from a conventional mortgage can be used for income and to replenish investment accounts by buying quality assets on sale, as I noted above.
Interest rates remain quite low.

At least for now, mortgage interest (for most people) is tax-deductible. Should clients pursue this approach, make sure they have a proper plan to cover the debt service so they don’t lose their house while attempting to maintain their retirement life style.

? Take out a reverse mortgage: This is a direct means of turning home equity into income. Clients should explore this option carefully, with the advice and consent of financial advisors, accountants and attorneys.

? Secure a life settlement: The client’s permanent life insurance death benefit can be converted into far more cash than the policy’s cash value. Term policies, too, are eligible for life settlements. In either case, the internal rate of return on the death benefit can be significant. If the client needs cash (or cash flow) now, the death benefit can be sold. Again, carefully investigate this option and its tax consequences.

? Leverage the life insurance death benefit: Life insurance death benefits enable a retiree to invade principal for retirement income knowing the principal will be replaced at death for a surviving spouse and/or for children and grandchildren. Remember, the client can buy life insurance inside a profit-sharing plan, 401(k) or solo(k) plan (not an IRA) using tax-deductible dollars for the premiums.

Even though this coverage is included in the taxable estate, with a $3.5 million death tax exemption ($7 million for married couples with properly titled assets and estate planning documents), federal estate taxes are not an issue for most people. But don’t forget about state inheritance taxes.

? Use cash value as a “Roth look-alike” account: Clients can contribute after-tax dollars that accumulate tax-deferred and can be accessed tax-free. The top income tax bracket remains at 35%. Clients who expect their income tax rate will increase during their retirement years should consider the tax benefits of this option.

? Do a Roth conversion: If clients’ adjusted gross income is less than $110,000 in 2009, they can convert a tax-deferred retirement account to a Roth by paying the income taxes now instead of later, potentially at a higher rate. In 2010, under the current plan, the AGI limit is waived, enabling everyone to convert. But note: The client needs to have sufficient funds in taxable accounts to pay for the income tax cost of converting to a Roth.

? Allocate assets among different accounts: I am a strong proponent of asset allocation for retirement income planning. Most investors spread their assets across four account types: 1) qualified retirement accounts, funded primarily with corporate bonds; 2) taxable accounts, funded primarily with large cap value stocks (very tax efficient); 3) fixed annuities and variable annuities with lifetime benefit riders, funded aggressively (with large, small cap and international positions); and 4) life insurance death benefits (for principal replacement and/or “stretch” Roth funding) and cash value (Roth look-alike) to hedge against the possibility of higher income tax rates during some retirement years.

Herbert K. Daroff, J.D., CFP, is a partner at Baystate Financial Planning, Boston, Mass. His e-mail address is hdaroff@baystatefinancialplanning.com.