When you finally reach your retirement date, one of your first questions will be: How much of my savings can I spend?

The standard rule of thumb for many years was 4%. Thats how much you supposedly could withdraw every year from your retirement accountseven on an inflation-adjusted basisand not run out of money.

Well, today, the conventional wisdom looks less clear. That rule of thumb, which was originally based on research done by Bill Bengen in 1994, has been scrutinized, criticized and even improved upon by many, including the likes of David Blanchett, the head of retirement research at Morningstar Investment Management.

The good part about the 4% rule is (that) it fixes your income through time, said Blanchett, who along with Farrell Dolan, a principal with Farrell Dolan Associates and John Olsen, the president Olsen Financial Group, spoke at a recent MarketWatch Retirement Adviser event in New York City. Its increased every year by inflation, but its based upon the initial value.

But the problem with that approach is that its based on a single point in time. You make the decision once, and you follow it for your entire retirement, said Blanchett, who recently co-authored a white paper on the subject of optimal withdrawal strategies for retirement-income portfolios. And thats kind of sub-optimal, because if we think about what happens when you move through time is things change. So as you age, youre going to live longer, potentially. If the markets go down, you could take out less income. ..The key to the 4% rule is that first its kind of a very basic starting point.

According to Blanchetts white paper, a significant amount of research has been devoted to determining how much one can afford to withdraw from a retirement portfolio, but surprisingly little work has been done on comparing the relative efficiency of different types of retirement withdrawal strategies.

In his study, Blanchett established a framework to evaluate different withdrawal strategies and then used that framework, in conjunction with Monte Carlo simulations, to determine the optimal withdrawal strategies for various fact patterns. Then he developed whats called the withdrawal efficiency rate, a measure that allows researchers to quantify the relative appeal of each withdrawal strategy to determine which one is best for generating retirement income.

Read Blanchetts paper.

As part of his study, Blanchett examined five different types of withdrawal strategies and found that the primary method employed by many (advisers), where a constant real dollar amount is withdrawn from the portfolio until it fails, is often the least efficient approach to maximizing lifetime income for a retiree.

So whats the best withdrawal strategy? According to Blanchett, the best one incorporates mortality probability, where the projected distribution period is updated based on the mortality experience of the retiree (or retirees) and the withdrawal percentage is determined based on maintaining constant probability of failure. Blanchett explains it this way in plain English: Every year the retiree is alive, figure out how much longer the retiree (or retirees) is (are) going to live. This is the mortality updating part. You do it every year because the longer you live the longer you are likely to live. An example is: The average life expectancy for a new born is something like 74 years. The average life expectancy for someone 65, though, is 85. This difference of 11 years (age 85 vs. age 74) is based on the fact that if youve survived to age 65 you are likely to live longer.

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Retirement income: What’s wrong with the 4% rule