I hear a lot about the 4% rule for withdrawing money from your retirement savings, but nothing about the "unexpecteds" that can create havoc with that plan. Can you explain some of the things that can go wrong if you follow the 4% rule - and suggest ways retirees can protect themselves? -- Cecilia K. Blue Ash, Ohio

The 4% rule is often sometimes presented as a near fail-safe strategy. Just withdraw 4% of your nest egg the first year of retirement, increase that dollar amount each year by the rate of inflation to maintain your purchasing power, and you have 90% assurance that your savings will last at least 30 years.

It all seems so simple and so certain. And it would be, if life unfolded with the predictability of a spreadsheet. Alas, that's not the case. As you note, there are many "unexpecteds" that can cause even the best-laid retirement income plans to go awry.

Let's start with subpar investment returns. The high probability that your savings will last 30 or more years if you stick to the 4% rule hinges on your investments earning a decent rate of return.

Assuming you invest in a diversified portfolio with a reasonable balance of stocks and bonds -- say, 50-50 -- history shows you've got a good shot at getting the returns you'll need. But the stock market can take some frightening dives that may lead to decade-long periods of mediocre returns or worse. And recent research shows downturns may be more common than we used to think.

If you're unlucky enough to experience a large loss or period of paltry gains, especially early in retirement, the odds of your nest egg surviving three decades can easily drop from 90% to 60% or lower.

Related: 'What's a realistic retirement age?'

Paradoxically enough, following the 4% rule could also be problematic if the financial markets thrive. If your investments earn outsize returns and you limit increases in your withdrawals to the inflation rate, you could end up with a big pile of cash late in life.

That might not seem like much of a drawback, particularly for your heirs. But think of it this way: If you're still sitting on a huge nest egg in your dotage, it could mean you lived a lot more more frugally than you actually had to earlier in retirement.

There are plenty of other potential hitches. You may periodically find yourself forced to spend more than the 4% rule dictates in order to meet unforeseen or higher-than-anticipated expenses -- health-care costs only partially covered by Medicare, the roof that had to be replaced after a freak storm, the money you shelled out to help a relative through a financial crisis.

Read the original here:
Retirement savings withdrawal: The 4% rule