You know firsthand how much effort it takes to save for retirement. But in many ways, the biggest challenge you'll face with your retirement savings comes after you retire, as you try to figure out how to make the money you've saved throughout your career last long enough to meet your needs and wishes.

To make that task easier, there's a simple rule that many retirees use to gauge how much money they can safely take from their nest eggs each year. To use the 4% rule, you take the total value of your retirement portfolio when you retire, and calculate 4% of that total. That's how much you may withdraw during the first year. Every year after that, you can increase the amount you withdraw by the inflation rate. By setting a standard of living, the rule can be very helpful -- and it's based on decades of historical information suggesting that your nest egg is likely to last 30 years or more at that rate.

Enter the bear market
Unfortunately, the severity of the current bear market has changed a lot of perceptions about investing -- and the 4% rule hasn't escaped the crash. Many people who've retired in the past few years have seen their retirement savings plummet in value -- and they're scared about whether the remainder will be enough to make ends meet for the rest of their lives.

The news is even worse for those who retired just before the tech bubble burst back in 2000. According to calculations from John Greaney, a frequent contributor to the Fool's Rule Your Retirement newsletter, if you retired in 2000 and followed the 4% rule with a portfolio split 75% in stocks and 25% in bonds, you would've seen your net worth cut in half -- and this year's withdrawals will use up fully 10% of your remaining principal.

And that's if you invested in a broad index like the S&P 500. If, like many retirees, you counted on stocks with a long history of paying reliable dividends, you may have seen an even bigger shock. Although dividend payers often perform better than average during down markets, many financial stocks were among dividend favorites for the newly retired. Take a look at the damage:


2-Year Average Annualized Return

Current Dividend Yield

General Electric (NYSE:GE)



Bank of America (NYSE:BAC)



Lehman Brothers



Pfizer (NYSE:PFE)






Stryker (NYSE:SYK)



Citigroup (NYSE:C)



Nordstrom (NYSE:JWN)



Source: Yahoo! Finance. *Does not reflect future cut in GE's dividend, which the company preannounced.

It's tough for investors who are still working to understand just how stressful that position is for current retirees. Even though the ups and downs of the financial markets may have a big impact on how you feel about your progress toward retirement, as long as you're still earning a paycheck, your lifestyle doesn't depend on how your investments perform.

But all that changes once you quit that last job and retire for good. Suddenly, you're relying on your retirement nest egg -- and the fluctuations threaten your survival.

When the rule doesn't work
The 4% rule was designed to give you confidence even through tough markets. But if you want to be on the safe side, there are some things you can do to make it work even better:

  • Freeze withdrawals. The rule gives you an inflation-related boost every year, but if you forgo your raise, it'll help your nest egg last longer. Taking a pay cut can do even more.
  • Look into other investment mixes. You don't want to give up on stocks entirely, but the right mix of assets can make all the difference. A diversified portfolio that includes stocks of both large and small companies, from the U.S. and elsewhere, can smooth returns over time, protecting you somewhat from excess volatility.
  • Tap other income. Look closely at your Social Security options. And if you really need more than your shrunk portfolio can support, going back to work can help you make ends meet.

We've seen a historically difficult period for new retirees. But with some early modifications, you can stretch your dollars as far as they'll go -- and feel better that your money will last as long as you do.

For more on making smart retirement moves, read about:

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.