After spending a lifetime saving for your retirement, you might feel entitled to relax after you retire. In reality, though, you have one of the hardest tasks still ahead of you: deciding how much of your savings you can afford to spend.

If you diligently set money aside from every paycheck for 30 to 40 years and invest it fairly well, by the time you retire, you're going to have a ton of money. But apart from some modest contributions from Social Security and perhaps a stray pension check here and there, that's all the money you're ever going to have -- and you need to make it last for as long as you live.

To help retirees figure out how much they can afford to spend without running out of money, many people rely on some simple rules that give you a good idea of how much you can withdraw from your retirement savings each year. Yet new research suggests that you might be able to improve on those old rules.

Is 4% enough?
Traditionally, the concept that many investors have followed is known as the 4% rule. Simply put, take the amount of savings you have when you enter retirement, and multiply it by 4%. The result is how much money you can afford to take from your savings for the year. Each subsequent year, you adjust that same amount for inflation -- regardless of the change in your portfolio's value -- and withdraw the new amount. Historically, using the 4% rule has allowed investors to tap their portfolios in measured amounts over 30-year spans without running out of money.

There are two problems with the 4% rule, though. First, the rule doesn't provide you with a lot of income even if you've saved a fairly large amount. If you didn't have to be 100% certain your portfolio could survive three decades of withdrawals, then you could afford to take a higher percentage of your savings, but it's prudent to assume the best-case scenario -- that you'll continue making withdrawals well into your late 80s.

More importantly, though, the method is highly dependent on where the stock market happens to be on the day you retire. As an example, consider how two retirees with the same portfolio of conservative stocks would use the 4% rule, depending on when they retired:


Value of 5,000 Shares per Company in Oct. 2007

Value of 5,000 Shares per Company in Feb. 2009

Procter & Gamble (NYSE:PG)



Coca-Cola (NYSE:KO)






McDonald's (NYSE:MCD)



Chevron (NYSE:CVX)



Merck (NYSE:MRK)



Kraft Foods (NYSE:KFT)







Source: Yahoo! Finance. Values as of end of month.

The person who retired in late 2007 would have gotten withdrawals of more than $83,000 per year -- which by early 2009 would have represented nearly 6% of the total portfolio. Conversely, the person who retired in 2009 gets less than $55,000 per year, simply because that date was near a market bottom. In other words, just a year and a half caused the second investor's annual withdrawals to fall by more than a third.

An alternative
The desire to come up with a more flexible option led to two possible alternatives. As a recent article in The New York Times describes, the two methods work differently but arrive at the same general result. In one method, you look at the overall market's P/E ratio to judge whether it's fairly valued or not. Based on historical comparatives, the more expensive the market is, the less you can safely take out -- but when the market is cheaply valued, you can sometimes take as much as 5% or 5.5% annually with a high degree of confidence.

The other method involves adjusting your withdrawals. During good markets, withdrawals can rise, but if your portfolio doesn't grow, you give up your inflation adjustment, or even perhaps take a pay cut. That has the ability to push withdrawal rates above the typical 4% threshold.

How it can help you
A higher withdrawal rate means that you don't need as large of a nest egg to get the same amount of money from your savings during retirement. Or, if you prefer to keep saving just as much as you are currently, then you'll be able to enjoy a better standard of living after you retire.

Of course, it's important to understand that all such calculations rely on how the stock market has behaved in the past. But even if stocks start acting unpredictably, a more flexible approach will help you adapt better than the fixed 4% rule. The idea that you should spend less when your investment portfolio is doing badly has always made intuitive sense -- and these alternative strategies may help you respond better to changing market conditions after you retire.

Want to learn more about coming up with the money you need after you retire? Chuck Saletta explains why Social Security won't get the job done -- and how you can get the resources you need from our Motley Fool Rule Your Retirement service. Click here for a free 30-day trial.

Fool contributor Dan Caplinger never trusts rules of thumb, no matter how useful they are. He doesn't own shares of the companies mentioned in this article. Coca-Cola is a Motley Fool Inside Value selection. Coca-Cola and Procter & Gamble are Income Investor recommendations. The Fool owns shares of Procter & Gamble. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy will stay with you till the very end.