3 Ways to Manage Sequence of Returns Risk in Retirement: Kitces

But by selecting the lowest withdrawal rate — "that is, [preparing for] the worst we've seen in 150 years" — 96% of the time retirees in the 20th century "would have finished with more than what they started with."

2. Dynamic Asset Allocation

This method, used by 20% of the audience, looks at how a portfolio investment mix is adjusted. "In some way, shape or form, we change how our assets are allocated in order to do this," he said.

One way to do this is to use "bucket strategies," which break up the portfolio into different time horizon buckets, so the first spending in retirement would be either cash or short-term investments. Next after a few years would be bonds, which have some premium that can be used, and the third is stock dividends. "By definition, you won't need to touch the equity bucket for 10 years because of using [cash and bonds first]," Kitces said.

Also, spending has to be divided by essential (food, clothing) and discretionary. Essential spending can be covered by annuities that guarantee an income stream for life, he added.

Stock returns can then cover discretionary spending, and shifting the portfolio mix toward more stocks as a client ages is an option. He noted stocks could go up for 30 years, or down for 30 years, "and in that case it doesn't matter what you do because everything's going to fail."

As chances are stocks will go up and down, a client who starts with a conservative mix and grows more aggressive "actually makes the retirement sequence work better."

3. Dynamic Spending

This method, used by 30% of the audience, looks at adjusting spending between upper and lower bands. He notes the "ratcheting" option is starting with an example of a 4% withdrawal rate and moving it up as a portfolio increases in value. However, spending shouldn't be ratcheted up until a portfolio is "so far ahead that even if the market pulls back you won't have to cut your spending."

One "super simple strategy" is if there is a 50% extra cushion of excess returns, take a 10% increase every three years, Kitces explains, adding that "this is for clients who want raises but can't tolerate cuts."

Another option: guardrail strategies that have floor and ceiling bands. When spending bumps against either band, it has to be reduced or can be increased. The bands can be calculated through the Monte Carlo method.

Kitces also recommended that advisors use official withdrawal policy statements for clients to outline retirement distribution.

— Related on ThinkAdvisor:

• Human Capital: Michael Kitces on Fiduciary Fight and Why He's 'Extremely Nervous' About Schwab Deal
• What's Wrong With Advisors' Retirement Planning Models, and How to Fix It
• Forget the 4% Rule: Planner Explains His Flexible Retirement Withdrawal Strategy