Does the 4 percent withdrawal rule, the guiding rule of thumb for most people doing retirement planning, still make sense in today’s low-yield environment?

Vanguard examined this question recently in a white paper, available for download on the Research & Commentary section of its website. It defined the 4 percent rule the following way.

“The 4 percent spending rule states that retirees with a diversified portfolio split between stocks and bonds can safely withdraw 4 percent of their initial balance at retirement, adjusting the dollar amount for inflation each year thereafter.”

How low are rates? Vanguard said that in almost every year from 1926 through 2011, the yield on a 50 percent stock and 50 percent bond portfolio exceeded 4 percent. The return peaked in 1982, when it averaged 10.6 percent. But in 2011, average yield dropped to 2.8 percent.

Vanguard concluded that given these rates of return that a retiree can’t blindly follow the 4 percent rule, but under most circumstances it remains a useful guideline.

Vanguard says the length of retirement is the biggest — and unknowable — variable. It recommends planning to live to age 95. It bases this on statistics from the Society of Actuaries, which calculates a 25 percent chance that least one spouse in a marriage will live that long.

To achieve an 85 percent probability of success, Vanguard says a 65-year-old with an aggressive portfolio of  80 percent stocks and 20 percent bonds could spend 4 percent initially, given current returns. But a 65-year-old with a conservative portfolio of 20 percent stocks and 80 percent bonds should limit initial spending to 3.5 percent in order to have an 85 percent chance of outliving his money.

In the white paper, Vanguard also other factors, including investment costs, which can have a seriously negative effect on returns. It points out that the difference between high costs and low costs for a conservative investor is particularly dramatic, dropping recommended spending for a conservative investor to 2.9 percent.

For most of us retirement saver, the bottom line is the need to combat this low-return environment by working longer and saving more.

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