August 15, 2011 | Catey Hill, Smart Money

This past week’s historic market gyrations have most investors worried, but none more so than retirees, who have a fixed pot that has to last as long as they do. And when the markets change dramatically, advisers say, so do the rules for turning a nest egg into income.

For most retirees, the news isn’t good: They’ll simply have to take less. Traditionally, advisers have said a well-diversified retirement portfolio could throw off 4% per year in income in perpetuity; more recently, some firms have created more flexible models that let retirees take 8% or more. Now that’s in jeopardy, with some advisers recommending retirees take no more than 2% to 3%, less if they can help it. “A lot of the old rules go out the window,” says Jeff Seymour, managing director of Triangle Wealth Management in Cary, N.C.

Even in stable markets, figuring out the best way to cash out of your retirement accounts is something of a guessing game. Advisers use complicated mathematical models that rely on all manner of inputs, including projections about inflation, the economy and markets performance as well as assumptions about clients’ future behavior. Those models are supposed to generate a sustainable number — say, 4% — that a client could take in good markets and bad.

But when the markets do in fact turn bad, advisers reconsider. Leaving a nest egg untouched gives it time to potentially recover from losses, says Frank Boucher, founder of Boucher Financial Planning Services in Reston, Va. And, frankly, the less a person spends this year, the more he potentially has to spend next year. “Some of the most important lessons from 2008 were the importance of having a financial plan and really knowing how much you can spend,” says Kelly Campbell, principal of Campbell Wealth Management in Washington, D.C.

Still, this may come as a disappointment to some retirees, especially those who have only just recovered from the last crash. For many others, this may be their first rodeo: This year, more than 7,000 Americans turned 65 each day, according to the AARP. Most advisers, though, say clients aren’t that surprised. “There are less people panicking than there were in 2008,” Campbell says.

Even in stable markets, figuring out the best way to cash out of your retirement accounts is something of a guessing game. Advisers use complicated mathematical models that rely on all manner of inputs, including projections about inflation, the economy and markets performance as well as assumptions about clients’ future behavior. Those models are supposed to generate a sustainable number — say, 4% — that a client could take in good markets and bad.

Advisers are managing this spending diet in different ways. Campbell says that a withdrawal rate of 2% to 3% might be more reasonable now (at least in the nearer term) than the traditional 4% rule. Others are going even more conservative: Boucher says that in rough times like these, you should withdraw as little as possible — limiting spending to the income you generate from your portfolio. You should also have some guaranteed income in your portfolio, says Joe Alfonso, CFP, and founder of Aegis Financial Advisory in Santa Clara, Calif. He sets up a bond ladder, including Treasuries and I Bonds, which, along with Social Security, should cover at least the basics, like food and housing.

Not everyone is ditching the 4% rule. Rick Kahler, president of Kahler Financial Group in Rapid City, S. Dak., that “a large number of people can still use it and have a 90% confidence that they will not run out of money.” To get the best results, clients need a diversified portfolio (he recommends an equal mix of stocks, bonds and alternative investments like commodities and real estate), as well as both international and domestic stock and bond exposure, he says. Indeed, researchers still see value there. “As a baseline guide for setting individuals’ spending expectations at retirement, it’s in the ballpark,” writes John Ameriks, the head of Investment Counseling and Research at Vanguard.

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