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Are You Taking Too Much From Your Retirement Funds?

After 40 years of saving money in retirement accounts, people are left to determine how to use that money wisely once they leave the workforce. "These days, most retirees are paranoid about running out of money," says John Gajkowski, co-founder of Money Managers Financial Group in Oak Brook, Illinois.

They may have good reasons to be concerned. Many retirees move their money into stable investments such as bonds which, while safe, offer little in the way of interest. Kerim Derhalli, CEO of the financial app invstr, notes the days of double-digit interest rates are long gone. "$100 is no longer growing by $10 a year," he says. "It's barely growing by $1 a year." That means old advice on how much can be safely withdrawn from retirement accounts is no longer relevant, and retirees need to be thoughtful about how they manage their 401(k)s and IRAs.

[Read: How to Pay Less Taxes on Retirement Account Withdrawals.]

Why you should ignore the 4 percent rule. Conventional wisdom has long held that retirees can safely withdraw 4 percent of their fund balance each year and not worry about running out of cash in retirement. Assuming a portfolio is split between stocks and bonds, a retiree is very likely to be able to withdraw 4 percent from a fund each year and still have money left over after 30 years.

However, today's sustained low-interest environment is making the 4 percent strategy more difficult to pull off. "When we look at the 90s, it's a whole different landscape," says Andrew Rafal, president of Bayntree Wealth Advisors in Scottsdale, Arizona. The 4 percent rule assumed retirees would easily make at least that amount -- if not more -- on their stocks and bonds each year. But bond rates are now so low that investors earn little to nothing off these investments. As a result, someone pulling 4 percent out of their accounts each year could end up depleting the balance well before his or her retirement is done.

[See: 10 Ways to Avoid the IRA Early Withdrawal Penalty.]

A better way to figure a safe rate. The 4 percent rule is convenient, but it never did address all possible scenarios. "The problem with rules of thumb is that everyone's thumbs are different," Gajkowski says.

Instead of relying on a percentage that can be applied broadly, retirees would be better served by taking a comprehensive look at their financial situation. Andy Smith, a certified financial planner and host of the radio show Investing Sense, says the key is to determine a person's income gap. To calculate that amount, people should add up pension, Social Security and part-time employment income and subtract out expected expenses. What's left is the income gap. "It really does become a much more manageable number," Smith says.

If income exceeds expenses, there may be no need to touch money in retirement funds at all. "If an individual is fortunate enough to have guaranteed funds [such as a pension or annuity], that makes it easy to decide how much to take out," Rafal says. If not, retirees may need to work with a finance professional to determine whether they can safely cover their income gap without risk of running their retirement funds dry.

Longevity and estate planning also play a role in these discussions, Gajkowski says. A safe withdrawal rate for someone whose relatives typically live into their 70s will be quite different than that of someone whose family members regularly make it to 100. What's more, those who want to leave an inheritance for children may need to be more conservative in their withdrawals compared to a retiree who is not concerned about leaving money behind.

[Read: Seldom-Used Features of 401(k) Plans.]

Doing damage control. Although it's best to calculate and use the proper withdrawal rate right from the start, a course correction is possible for those who are already retired and taking out too much. "It's truly going back to the drawing board," Smith says, "taking a fine tooth comb to their budget and their investments." Although there are withdrawal rate calculators available, Smith strongly recommends finding a financial advisor who is a fiduciary -- that is, someone who has a legal obligation to work in the best interest of his or her clients. These professionals can run Monte Carlo simulations, which is a model that allows retirees to see all possible outcomes from best-case to worst-case scenarios. "As a retiree, you have to be very cautious in today's environment," Rafal says. "There's no room for mistakes."

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