How to make your retirement savings last

(Money Magazine) -- What's the latest thinking on how much I can withdraw from retirement savings? -- Ann Raymont, Indianapolis.

The standard answer to the question of how to turn retirement savings into a steady post-career income has long been "Follow the 4% rule." That's what advisers say and what you've read in the pages of Money for years.

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Ultimate Guide to Retirement

• Getting started
• 401(k)s & company plans
• Investing
• Annuities
• IRAs
• Self-employment plans
• Pensions and benefit plans
• Social Security
• Insurance
• Estate planning
• Living in retirement
• Getting help

But while that oft-cited strategy has advantages -- if you withdraw 4% of your savings the first year of retirement and boost that amount annually for inflation, chances are your money will last 30 years -- it also has a big inherent flaw.

You're imposing a series of predictable withdrawals on a stock and bond portfolio that can fluctuate in value.

That disconnect leaves you vulnerable in two ways. If the markets do poorly, especially early on, you could run through your savings too fast. Yet strong market performance could leave you with a huge portfolio late in retirement, which means you lived more frugally than you had to.

Recently, though, two prominent 401(k) advice firms, both led by Nobel laureates in economics, have introduced retirement income strategies that may challenge the 4% rule as the default.

While the two firms come at the issue very differently, both systems hold lessons for current and soon-to-be retirees.

These new alternatives to the 4% rule aim to preserve its benefits -- reliable payouts that should last for decades -- while avoiding the problem of having too much left over. That can translate to a higher income over the course of your retirement.

The new service from Financial Engines, the firm founded by William Sharpe, invests the bulk of your 401(k) in bond funds to provide a minimum income, then devotes the rest to stocks to boost payouts over time.

If you're a 65-year-old, for example, about 80% of your 401(k) would go into bonds at retirement. Interest rates and inflation expectations determine your initial payout, which typically ranges from 4% to 6% of your nest egg.

Yes, 80% is a high bond allocation for a new retiree. But the idea is to give you a good shot at maintaining a minimum income, even if that means giving up some potential for future growth.

Financial Engines sells a portion of your stocks each year, reinvesting the proceeds in bonds to generate more income and give you a raise. If the stock market does poorly, your income may not keep pace with inflation or rise at all, although even over the past decade your payments would have crept up.

For now at least, you can sign up for this service only if your 401(k) plan offers it and you let Financial Engines manage your 401(k) for an annual fee, typically 0.4% of assets.

Another new retirement income program comes from GuidedChoice, the advice firm co-founded by Harry Markowitz.

This program, GuidedSpending, tries to solve the problem of underspending by letting you test-run several income options and recommending a portfolio that gives you a high probability of success. While Financial Engines relies heavily on bonds, GuidedSpending allows for more stocks.

GuidedSpending costs $50 a year if you use it with only your 401(k), $250 annually if you include all your retirement accounts in the program. You can have GuidedChoice manage your investments for a fee, typically less than 0.45%.

I think it would be extremely difficult to duplicate these systems on your own. That said, if your plan doesn't offer one of these services -- only about 10% of 401(k) participants are in plans that do -- or you prefer to manage your own withdrawals, I see two lessons to apply.

The first is that when you're drawing down your savings in retirement, you can't just set a spending target and stick to it regardless of what's going on in the markets. To avoid depleting your funds too soon or ending up with a big pile of cash in your dotage, you have to be willing to adjust.

The Financial Engines system, for example, builds in flexibility by tying your payout increases to the stock market.

As a practical matter, navigating the path between spending too little or too much means setting a reasonable initial withdrawal rate -- say 4% to 5% -- and then forgoing a raise or scaling back withdrawals if the markets take a hit, and spending more freely if the markets are on a roll.

The second takeaway is that at some point in retirement you may want to think about devoting at least a portion of your savings to an immediate annuity to get guaranteed income (an option with GuidedSpending and, late in retirement, Financial Engines).

Given the fact that even firms founded by Nobel laureates can't offer ironclad assurances when it comes to your future spending, something as simple as a guaranteed monthly check for life might not be such a bad thing.