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NEW YORK (MainStreet) — Retiring? Go ahead, live it up! Travel, eat out, lavish your grandkids with gifts ... But not until you've embraced the latest thinking on the famous Four Percent Rule.

Now 20 years old, that's a well-known rule of thumb for making sure your money lasts as long as you do. Devised by financial adviser William Bengen, the rule says new retirees can withdraw up to 4% of their retirement portfolio in year one, then increase the dollar amount each year by the past year's inflation rate. 

That way, the withdrawals grow year by year to offset inflation so buying power stays steady. The rule assumes a mix of stocks and bonds providing typical returns, allowing the nest egg to last 30 years.

But in recent years many experts have had doubts. For one thing, yields on fixed-income investments have been well below the long-term averages incorporated into the rule. For another, stocks fell off a cliff during the great recession, losing more than 50% of their value.

Imagine the effect on someone who retired just before a similar collapse with $1 million in retirement savings.  Using the rule, this person could withdraw $40,000 in year one. If inflation ran at a meager 1%, the retiree would withdraw just under $41,000 two years later. But if the portfolio's value had fallen to, say, $700,000, this withdrawal would equal nearly 6% of assets — dramatically increasing the risk of running out of money before the 30 years ended. 

Granted, the markets could recover. But the money that had been withdrawn and spent would obviously not share in any rebound. The portfolio would have been damaged permanently, making it very hard for the long-term plan to succeed. If the market took several years to recover, the ever-larger withdrawals would do even more long-term damage.

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Recognizing this, many advisers have suggested a stingier withdrawal pace — 3% a year, perhaps only 2%. The problem is that means one would need a much larger nest egg to produce the same annual income — so large many people would throw up their hands in despair. You'd spend a lifetime accumulating $1 million and get only $20,000 a year in retirement — before taxes? Ridiculous!

So how do you get from here to the living-large lifestyle described above?

With flexibility. You don't need to skimp every year to prepare for a disaster that might never happen so long as you can cut spending if it does.

That way, if the $1 million portfolio were to fall to $700,000, you could hit reset and withdraw only 4% of the new amount — $28,000 instead of $40,000 plus inflation. If the fund were to recover, you could hit reset again and take 4% of the new amount, then go back to annual increases to offset inflation. 

Obviously, you'd have to plan ahead to be able to reduce withdrawals from $40,000 to $28,000. The key: Minimize the fixed expenses you can't easily wriggle out of. Don't retire, in other words, with a big mortgage, or a home with a huge property tax and heating bills. Avoid sinking money into a lot of toys or a second home, things that could be hard to unload without loss in an economic downturn.

But what you sacrifice in quality of life from fixed expenses such as a big home can be offset by spending on things that are easy to cut back, such as travel, entertainment and dining out.

If you need to tighten your belt, you'll be able to — hopefully needing to only for a little while. By avoiding big withdrawals from a shrunken portfolio you'll have a better chance of making a full recovery, assuring that you don't outlive your money, and eventually resuming that discretionary spending that was so much fun.

— By Jeff Brown for MainStreet