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I once asked a friend whose son races motorcycles professionally, "What is the specific skill that distinguishes winners at the highest levels of motorcycle or automobile racing? Is it balance, strength, endurance or just guts?" He answered, "Great racers have an instinctive feel for what are known as the 'limits of adhesion.' It's the exact speed on curves beyond which the vehicle will go completely out of control. Being able to drive consistently at just that limit is the special talent marking a winner."

I thought about this with respect to retirees who often hunker down in what they mistakenly consider to be "safe" investments with investment incomes far below what could have been achieved had they operated closer to some financial equivalent of the "limits of adhesion." The operative word here is "closer" as opposed to being at or beyond the limit.

The goal in retirement is to organize investments in such a way that they generate income of roughly 5 percent per year and still gain in value overall to keep pace with inflation. This is not that difficult. Over the past 15 years a 50/50 allocation of investment-quality bonds and large-company value stocks would have paid interest and dividends averaging roughly 4 percent per year.

Wait. I said the income stream would need to be 5 percent, but interest and dividends in the above example come to only 4 percent. Here's how you get that additional 1 percent. The increase in capital contributed by appreciating stocks would have added an average of 3.5 percent in gains to the total portfolio. The missing 1 percent could safely come from the capital on the stock side, since inflation during the period has been closer to 2.5 percent.

The past 15 years, by the way, includes two major stock market crashes. The starting point of the period, 1999, marked an all-time high for the previous 20-year period. In other words, the 15-year period we're viewing is one of the most challenged we could have chosen.

A little "tweaking" can improve results by moving closer to the "limits of adhesion." We can consider going beyond just investment-grade bonds (reflected in the above example) to include mutual funds that invest in high-yield corporate bonds and emerging-markets' government bonds denominated in dollars. Bond funds operating in these higher-risk categories will generate interest yields closer to 6 percent. It's true that the capital value will fluctuate, because high-yield bonds are valued somewhat like stocks when the economy struggles. Their value, temporarily, becomes what the public perceives their worth to be, but unless the underlying bonds default, they return to the norm. In 2008, for example, high-yield bond funds lost 20 percent, but snapped back to normal values the following year. Learn to ignore those fluctuations. They don't affect your interest earnings.

Tweaking the stock side to generate more dividend income is an exercise in seeking stock mutual funds that have high-dividend yield as their primary objective. These funds currently have dividend yields of about 3 percent. In the search for yield in the current interest rate market, the flood of money into dividend-paying stocks is causing those securities to rise in value. That demand is what drives our 3.5 percent gain in capital value of the entire account -- the stocks and bonds combined.

In the face of these straightforward approaches to managing money to provide income, there are annuities and so-called "managed payout" funds that struggle to meet the needs of retirees with complicated formulas that, in the case of annuities especially, limit the downside but keep most of the upside. How much downside is there when we consider that in 39 years there have only been two years that experienced a decline of more than 20 percent -- and the predictable "snapback effect" occurred shortly thereafter.

In the same vein, managed payout funds designed to use up earnings and capital over a period of time go to some lengths to limit downdrafts and volatility. In doing so, they create opportunity costs that reduce what could have been greater income earnings and capital appreciation. The payouts these funds schedule are not much greater than the 5 percent cited in the example above and the account is designed to eventually drop to nothing instead of growing to keep pace with inflation. One could say it's a "mismanaged payout fund."

A retiree searching for a decent retirement income and protection against inflation won't find either in most of what the financial services industry sells as their solutions to the need. It makes better sense to come to terms with some volatility in capital values if that's what comes with steady interest and dividends. The alternative is to go with annuities and managed payout funds that leave you (or your heirs) with nothing. While you don't have to be racing at the limits of adhesion, you can at least be on the track instead of sitting in the pits.