It may not seem like the most important subject, but there are in fact few financial matters more critical than your retirement accounts and the rate at which you draw down money from them after you stop working. Actually, it's an issue that can directly bear on the quality of your life in those years.

If you withdraw too much too fast, you run the risk of outliving your nest egg and might later on have to consider options such as taking out reverse mortgages or going into debt to meet expenses. Withdraw too little and you might have to skimp and unnecessarily compromise your lifestyle during the more active early years of your retirement.

It's a balancing act that most people perform without the safety net of a salary. Meanwhile, they worry they'll be shortchanged by Social Security at the same time their employee retirement plans are shifting from precise defined benefits to inadequate defined contributions. A volatile stock market and very low bond yields don't help matters.

Certainly for those who were thrown out of work and forced into early retirement, this could be a particularly brutal time. But on the other hand, should investors constantly be expecting the worst? Should they really be bracing themselves for another crisis like the one we just experienced when they determine their future withdrawal rates? It was a perfect storm, but such storms are rare.

Challenging Convention
The average advisor would suggest a static retirement portfolio withdrawal rate of about 4.5%-based on the investor's assets, growth, annual expenses and longevity. This figure would then adjust annually for inflation. But Jonathan Guyton, a principal at Minneapolis-based Cornerstone Wealth Advisors, says that's rather arbitrary.

According to his own research-based on a portfolio of 65% stocks, 30% bonds and 5% cash-Guyton thinks retirees can enjoy a higher withdrawal rate with a very high degree of certainty that they won't run out of money as long as they properly monitor the assets and annually rebalance, an idea laid out in the article he co-authored with William Klinger, "Decision Rules and Maximum Initial Withdrawal Rates," which appeared in the Journal of Financial Planning in March 2006. Here's how his approach works:

Let's start off at the beginning of 2008 with a $1 million retirement portfolio. Guyton's client is withdrawing at an annual rate of 5%. At first, that amounts to $50,000. But by the end of December of 2008, that portfolio would have fallen to $700,000. A $50,000 withdrawal suddenly amounted to a rate of 7.1%.

"In this scenario," says Guyton, "I would've suggested the retiree reduce his or her effective withdrawal by 10% to $45,000. And for any year that experiences a loss, I would not make an inflation adjustment for the following year." This approach lowers the withdrawal rate to 6.4%.

By the end of December 2009, the portfolio had rebounded to $820,000. Guyton re-evaluated and increased the withdrawal by 2.8% for inflation. This pushed the actual withdrawal amount to $46,260, a rate of 5.6%.

"Folks are prone to making the worst decisions during times of extreme volatility and stress," he observes. "If one doesn't panic and subscribe to a doomsday scenario, then one is likely to see the market stabilize and start moving back up."

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