When faced with complex choices, it is nice to have a simple rule of thumb to rely on. Because these rules are easy to learn and apply in making calculations or decisions, there is no shortage of these short-cuts in the complex world of financial planning. However, by definition, such rules are designed for broad application and are not intended to be strictly accurate or reliable for specific situations.

In retirement planning, one important rule of thumb is the so called "4% Rule." This rule offers a quick approach to answering the million dollar question of how much you can withdraw from your retirement nest egg each year without spending your final days in poverty. Or, how large do your retirement accounts have to be to sustain you through a fairly long retirement? The rule suggests that if your nest egg consists of a diversified portfolio that has at least a 50 percent allocation to stocks, you can safely start your retirement by withdrawing 4 percent of your portfolio in the first year, and increase your withdrawals in subsequent years to keep up with inflation.

So, if you are in the planning stage and estimate you will need $40,000 per year to supplement your Social Security, the 4% Rule implies you will need to have $1 million stashed away at retirement in order to be fairly certain that you will not out-live your money.

If your retirement plan is counting on paychecks equaling 5 percent to 10 percent of your portfolio each year, the 4% Rule may seem like a pittance. Granted, 4 percent sounds paltry given that you expect your investments to provide more than a 4 percent annual return. Given the recent performance of the world's stock and bond markets, however, you may question whether even a 4 percent withdrawal rate is safe.

To tackle this question, it helps to re-examine the research that led to the development of the safe, 4 percent withdrawal rate.

The 4% Rule was originally developed in 1994, based on historical financial market performance back to 1926. Although this research pre-dates the most recent malaise, the historical record at the time incorporated a wide range of market outcomes including substantial stock market declines during the Great Depression, just before World War II, and during the early 1970s. Based on this historical record, the 4 percent withdrawal rate was determined to be a safe amount, capable of sustaining a 30-year retirement, despite the occasional severe market downturn.

This early research has been tested many times, so much so that the 4% Rule is now offered as general retirement planning guidance. Later studies developed variations on the rule, suggesting that, if you are willing to adjust your withdrawals based on the performance of your portfolio, you might be able to start with a higher withdrawal rate, perhaps as high as 6.5 percent, and still be safe.

All of these withdrawal rules require ongoing exposure to the stock market, the courage to stick with your balanced portfolio during down markets, and the discipline to periodically re-balance your investments during periods of uneven performance. Since rebalancing means selling your better performing assets to buy more of your poor performers, this can be a challenge for many investors, especially after a significant market decline. The 4 percent withdrawal rate requires the strong recovery power of the stock market to succeed. Avoid stocks after a market decline, moving your portfolio entirely to bonds or cash, and even a 4 percent withdrawal rate may be too high to sustain over your lifetime.

While the 4% Rule provides us a quick way to judge whether a portfolio is likely to last throughout retirement, it is not very useful as a planning tool because it is not likely to apply universally. For most retirees, expenses are not permanently fixed on their retirement date, only to rise, or fall, by the rate of inflation each year. Instead, expenses are likely to change based on lifestyle choices that will evolve over time. Successfully navigating retirement takes careful planning based on an understanding of the varying nature of these retirement expenses, in addition to knowledge of market history.

David T. Mayes is a Certified Financial Planner professional at Mackensen & Company, Inc., a fee-only advisory firm in Hampton. He can be reached by e-mail at david.mayes@mackensen.com.