You can boil down retirement planning to a few simple numbers -- such as these:

  • How much you expect to need in retirement.
  • How much you've got saved.
  • How much more you need to sock away.
  • How rapidly you expect your savings and investments to grow.
  • How much you plan to withdraw from your nest egg each year in retirement.

Let's spend a little time thinking about that last item. Your withdrawal rate is rather critical, you know. There are conservative and less conservative ways of looking at it.

In our Rule Your Retirement newsletter service, I learned that to make your nest egg last, you should conservatively plan to withdraw about 4% of it per year in retirement (with inflation-adjusted increases). That's because financial studies, such as one done at Harvard in 1973, showed that only a 4% withdrawal rate can make sure you won't exhaust your principal.

So let's say that you retire with $1 million in the bank. Four percent of $1 million is $40,000. That's about $3,333 a month. Will that be enough? You'll likely have some Social Security money augmenting it, but it may still seem insufficient.

What can you do about this troubling state of affairs? Well, one option is to simply start saving and investing more. And to find the most effective investments, you must take your risk tolerance into account. For retirees or near-retirees, dividend-paying stocks make a lot of sense. They offer not only the chance for capital appreciation, but also a steady and growing stream of cash. To start your search for dividend payers, look for companies with yields greater than the 1.7% the S&P 500 offers. Here are a few solid candidates:

  • Altria (NYSE:MO), 4.3%
  • Bank of America (NYSE:BAC), 4.9%
  • General Electric (NYSE:GE), 2.7%
  • Harley-Davidson (NYSE:HOG), 2.3%
  • Paychex (NASDAQ:PAYX), 2.8%
  • Pfizer (NYSE:PFE), 4.5%

Such firms are actually good for just about any investor, and you'll find companies like them in my own portfolio.

Here's another option: Just change some numbers. Remember that 4% withdrawal rate? Well, it's conservative, giving you excellent chances of not running out of money before you ... uh, expire (assuming that your portfolio sports ample diversification and stocks). You can withdraw more each year, though. If you're taking out 5% annually over 30 years, you have roughly a three-in-four chance of not running out of money. A 5% withdrawal rate on a million smackers will yield a $50,000 income. Sound better?

By the way, here's a little trick. If you want to know how much you'll need by retirement if you want your nest egg to kick out a certain annual income at 4%, just multiply your desired income by 25. Want $65,000? You'll need $1.63 million. Want $70,000? You'll need $1.75 million. Meanwhile, if you're using a 5% withdrawal rate, multiply by 20. Want $65,000? Save $1.3 million. Want $75,000? Accumulate $1.4 million. (See how changing that little 4% to 5% lets you sock away hundreds of thousands of dollars less? Of course, remember that you now face roughly a 25% chance of running out of money.)

Controversy!
Over at fundalarm.com, astute financial and mutual fund observer Roy Weitz noted a troubling development among some financial advisors: To win more business, they're making projections for your financial future based on higher and higher withdrawal rates. He cited one advisor who's recommending 6.6% withdrawals.

With a 6.6% withdrawal rate, you'll enjoy $66,000 per year, not $40,000, from a million-dollar nest egg. To enjoy a $75,000 income, you'd only need to save 15.15 times that, or a little less than $1.2 million. Weitz notes, "Advisers who support high withdrawal rates are likely to be popular, yet they have the potential to ruin lives. ... Advisers who support conservative withdrawal rates will be perceived as no-funs, but they may do a more responsible job." He concludes: "Planning to take the lowest possible withdrawals just seems to make sense. ... Remember, for many financial planners and brokers, these retirement withdrawal calculations are just models ... for you, it's the rest of your life."

Get up to speed
I encourage you to spend some time reading up on this topic. Type "withdrawal rate" and "retirement" into Google and you'll get an eyeful. Alternatively, I invite you to take advantage of a free month-long trial of the retirement reference I use most often myself, our Rule Your Retirement newsletter service. You'll be able to access all the past issues, where the newsletter has tackled withdrawal rates several times.

In addition, you can join in on the team's eight-lesson "How to Plan the Perfect Retirement" online seminar, which started this week. You can reserve your seat for free by signing up for our newsletter (or just sign up for a free, no-obligation trial) and you can participate in the seminar. Get details here.

Longtime Fool contributor Selena Maranjian owns shares of General Electric. Pfizer is a Motley Fool Inside Value recommendation. Bank of America is a Motley Fool Income Investor recommendation. The Motley Fool isFools writing for Fools.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.