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Rethinking the 4-percent retirement rule in uncertain market

Rene Mansi | E+ | Getty Images

It may seem like a fairly safe bet. Withdraw no more than 4 percent from your retirement savings each year, and you'll have enough to last the rest of your life.

After all, many people's biggest fear in facing retirement is the possibility of outliving their money. To make sure retirees have enough money, many financial advisors have relied on a rule that a nest egg should hold out as long as they withdraw a maximum of 4 percent annually.

But some certified financial planners now say the so-called 4 percent rule could put your retirement savings at risk.

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"I don't think the 4 percent rule is as feasible today as it was in the past, and the reason for that is because the market returns haven't been as consistent as we've seen in the past," said Richard Coppa, managing director of Wealth Health.

The rule, calculated in the 1990s, was based on a model portfolio that contained a certain mix of stocks and bonds: 60 percent large-cap stocks and 40 percent intermediate-term government bonds.

Times have changed, though. And with historically low bond yields and a volatile stock market, the rule may no longer apply.

"In the last decade, we've seen a dot-com bubble, we've seen a real estate bubble, we've seen a financial crisis—and all of that impacts the types of returns we're getting on both stocks and bonds," Coppa said.

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To make sure clients don't outlive their savings, Coppa advises them to get a handle on their cash flow. Managing income and expenses in retirement is more important than relying on any rule, he said. Bottom line, knowing what you'll spend is the best way to determine what you'll be able to withdraw.

But Doug Lockwood, a certified financial planner with Harbor Lights Financial, said it is possible for retirees to withdraw 4 percent a year from savings and have the money last—as long as the mix of assets is well-diversified. A model portfolio of 60 percent stocks and 40 percent bonds could work, depending on the type of equities.

"You have to look at not only interest rates and bond rates that you can draw upon, but where am I getting my income from my equities," Lockwood said. "At that point, you have to look at dividend-paying stocks to grab that equity yield, which is quite frankly a better bet these days ([han bond yields]."

Depending on age and risk tolerance, Lockwood said, a 4 percent withdrawal rate is a good guideline for gauging whether you'll have enough money in retirement. But also consider what effect taxes and inflation have on your investments.

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"With inflation and taxes, that investor ... has to be able to make at least a 7 percent return on average to be able to get that 4 percent in their pocket. That can be challenging at times," Lockwood said. "A lot of folks are just not invested appropriately to be able to address that type of need."

But Lockwood and Coppa agree that the most important factor in not outliving your nest egg is to save more. Even increasing your retirement contributions to reach the maximum annual limit for 401(k)s and IRAs may not be enough, so consider adding more money to taxable accounts earmarked for retirement.

In the end, how much money you put in will ultimately determine how much you'll have to take out.

By CNBC's Sharon Epperson. Follow her on Twitter @sharon_epperson.

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