The much derided Bicycling Magazine had a short article about this, recently. Among their suggestions were to use open-air headphones instead of earbuds, because earbuds seal off your ear canal and block out ambient noise. They also suggest that you keep the volume low enough to hear wind noise, so that you'll be able to hear other things.
On a legal note, check your local laws before you try anything. Some states prohibit earphones altogether, and many of them (like my state) only allow cyclists to use a single earphone.
I would test this on bike paths before I even considered taking such a distraction on the street with me. Actually, I just wouldn't do it.
You might also be able to rig something up with actual speakers, instead of headphones.