Financial planning is full of rules of thumb. One of the most famous is the "Four Percent Rule," which simply says that in retirement you can safely take out no more than 4 percent of the combined value of all of your financial assets each year with an expectation that your money will last 30 years or more, which is longer than the average length of time Americans spend in retirement.

However, the Four Percent Rule may be much more valuable as a guide rather than a steadfast rule.

A bit of history: The rule was originated by my fellow NAPFA member and fee-only financial advisor Bill Bengen. His conclusions, published in the October 1994 issue of the Journal of Financial Planning, were based upon a number of simulations of historical market behavior.

The result was a commonly used formula for managing retirement expectations, based on a number of assumptions about retiree needs and market performance. For example, at age 65 if you have a retirement portfolio of $1 million, and don't want to run out of money until you're 95, you can safely withdraw up to $40,000 a year.

But what if real life strays from these underlying assumptions? For example:

--What if you need more than 4 percent annually?

--What do you do if you live to be 100 or 110?

--What if you get really spectacular returns in your first few years of retirement so that by the time you're 95, you find you have a much bigger surplus than you expected? You may realize that you could have afforded a more comfortable lifestyle during retirement.

--What if, in the first few years of your retirement, the stock market drops by 45 percent?

Questions like these very quickly show the real value of the rule: it's a good place to start.

Read more:
Using the 'Four Percent Rule' for Retirement Planning