In the "old days," when life spans were shorter, people often retired only a few years before dying, if they retired at all. Many employers provided their employees with pensions that paid a monthly income until their death. As a result, many of these retirees did not have the financial worries that current or future retirees will face. Their pensions provided income as long as they lived, and shorter life spans meant that their savings did not have to last very long.

The situation is vastly different today. Many employers have discontinued their pension plans and put the retirement savings responsibility on their employees' shoulders via 401ks and other such plans. On top of that, life spans are increasing. It's not uncommon for people to live into their 90s, meaning that they might live 30 years or more after retiring.

This poses a potential problem for many current and future retirees. Receiving little or no pension income as well as Social Security income that doesn't come close to covering all expenses, how can retirees make sure that their savings last 20, 30, or even 40 years in retirement?

Many Americans are sorely mistaken on how much they can withdraw from their retirement savings each year once they stop working. Think you can retire with, say, $400,000 in savings? If you anticipate that your withdrawals during your first year of retirement will be $40,000, that's a 10% initial withdrawal rate (IWR). (IWR = first year's withdrawal divided by the initial portfolio value.)

You might be very disappointed, and alarmed, to learn that withdrawing 10% of your retirement savings in the first year – and then increasing your withdrawals each year as your expenses increase due to inflation – puts you at significant risk of running out of money should you live at least several years beyond that.

Fortunately, significant distribution planning research has been done over the past several years by academics and financial planners. Initial research performed by William Bengen, a financial planner in California, showed that an IWR between 4.1% and 4.6%, with increasing withdrawals each year by the inflation rate, resulted in an excellent chance of never running out of money over a 30-year distribution period.

Think about that. If you must withdraw $50,000 from your savings during your first year of retirement, then you'd need an initial portfolio balance of almost $1.1 million to keep your initial withdrawal rate at 4.6%.

A 2004 study by Jonathan Guyton (a financial planner in Minnesota) and William Klinger determined the maximum withdrawal rates that result in a high probability of success, while also maintaining purchasing power as inflation rises, for a 40-year time period beginning in 1973. Why 1973? It might have been the worst year ever for someone to retire and begin withdrawing from their savings because of huge stock market losses over the following two years coupled with very high inflation for several years.

Guyton and Klinger's study showed that withdrawal rates during retirement can be maximized by (1) diversifying the retirement portfolio among a variety of asset classes and (2) implementing standardized "decision rules." The study concluded that the IWR could be between 4.8% and 6.2% (depending on how a portfolio is allocated between stocks, bonds, and cash) while providing a very high likelihood of maintaining purchasing power and not running out of money.

What does this all mean for people who are recently retired or hope to retire in the next few years?

• Lack of a formalized retirement distribution plan  could be very harmful to their financial health during retirement.
• They might need to save far more than previously anticipated.
• They should pay close attention to how much they withdraw each year from their savings.
• They can maximize their withdrawal rates – without the likelihood of undesired changes to their spending – by  implementing certain portfolio management and withdrawal rules.

This could be a daunting task for many people who don't have the foggiest idea of whether they've saved enough for retirement or how much they can safely withdraw each year during retirement. It might be a good idea for many of these folks to seek the advice of a qualified financial planner, especially before deciding whether or not they can retire. If you'd like to search for a financial planner to help you with these concerns, among others, a good place to start is at NAPFA's website.