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The best asset for many investors right now may simply be cash—money-market funds or short-term certificates of deposit. That's especially true for retirees, who rely on their low-risk investments for both income and capital preservation.

The stock market has been hitting new highs, amid growing hopes that the economy is rebounding from the long slump. Last week the Dow Jones Industrial Average closed near its all-time high, set July 23. Likewise, the S&P 500 index was just 0.2% below its record; investors are sitting on thumping gains of 18.6% since the start of the year.

But rising stock prices produce risks as well as gains. At current levels, U.S. stocks offer a paltry dividend yield of just about 2.1%—meaning a retiree investing $100,000 in the S&P 500 will earn just $2,100 a year in dividends.

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The picture is little better for immediate annuities, insurance products that allow retirees to convert a lump sum into a guaranteed income stream for life. According to Hersh Stern, an industry expert and the head of ImmediateAnnuities.com, a comparison website, payout rates on annuities remain little improved on the record lows seen a few months ago.

A 65-year-old man investing $100,000 in an immediate annuity today would lock in an income of about $535 a month for life, says Mr. Stern. In early 2009, the same amount would have generated an income of $675 a month.

We are in a historic situation, according to new research by David Blanchett, the head of retirement research for investment research company Morningstar, Michael Finke, a professor of financial planning at Texas Tech University, and Wade Pfau, professor of retirement income at the American College.

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"There are no historical periods in the United States where comparable low bond yields and high equity valuations have occurred simultaneously," they wrote in a recent paper.

The problem, they say, is that most retirement planning ignores market valuations. As a result, it may offer a misleading guide to investors today. By their calculations, investors today who hold a typical conservative portfolio of 40% stocks and 60% bonds cannot safely rely on withdrawing 4% a year and still making their portfolio last 30 years. They believe such investors run a 50% chance of running out of money before they die.

Recent research by Jack Vanderhei at the nonprofit Employee Benefit Research Institute found comparably sobering concerns. Current low interest rates, he says, will make it tough for many baby boomers and members of Generation X to meet their retirement-income needs from their savings.

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Such actions are likely to lead to interest rates returning over time to more "normal" levels. No one knows for certain when that will happen or exactly where interest rates will end up. But many economists, based on history and current expectations for inflation, suggest rates on 10-year Treasury notes may return to 4% or even higher, and interest rates on other bonds—such as corporate debt and longer-term government bonds—may go higher still.

If that should happen, investors who own bonds today will lose money as bond prices will fall. Those who own cash will get the benefit of higher rates.

The situation will be similar for those who wait to buy annuities. As Mr. Stern points out, annuities are constructed by insurance companies using bonds as "raw materials."

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