The Motley Fool : How to make your retirement money last

A critical part of retirement planning is determining how much you can afford to withdraw each year while in retirement so that you don’t end up running out of money before you run out of breath.

Many common formulas rely on average rates of return and inflation. Over the long term, an average rate should work, especially when you’re still saving for retirement. Unfortunately, actual year-to-year results won’t be the same as the average, and for retirees in some time periods, those yearly variations may prove devastating.

When you start withdrawing is just as important as how much you take, and whether the market is surging or slumping in your first years can make a big difference. Since we can’t predict the future, what’s the right percentage to withdraw?

Three Trinity University professors — Philip Cooley, Carl Hubbard and Daniel Walz — looked at historical annual returns for stocks and bonds from 1926 through 1995. They found that withdrawal periods longer than 15 years dramatically reduced the probability of success at withdrawal rates exceeding 5 percent. They also concluded that:

“Younger retirees who anticipate longer payout periods should plan on lower withdrawal rates.

“Owning bonds decreases the likelihood of going broke for lower to midlevel withdrawal rates, but most retirees would benefit with at least a 50 percent allocation to stocks.

“Retirees who desire inflation-adjusted withdrawals must accept a substantially reduced withdrawal rate from the initial portfolio.

“Withdrawing 4 percent or less from a stock-dominated portfolio is probably too conservative.

“For payout periods of 15 years or less, a withdrawal rate of 8 percent to 9 percent from a stock-dominated portfolio appears sustainable.

We’ve seen studies suggesting “safe” withdrawal rate ranges between 4 percent to 6 percent of a retiree’s starting portfolio. Rates above 5 percent increase the probability that a retiree will go broke in her lifetime, so to be more conservative, perhaps try to get by on 4 percent. And to add a measure of stability to your portfolio, consider adding some bonds to your stocks.

Plan carefully. And learn more about retirement investing at www.fool.com/retirement.htm.

Dividend Taxation

Q: Are dividends really taxed twice? — H.M., Omaha, Neb.

A: Yup. Imagine that Carrier Pigeon Communications (ticker: SQUAWK) rakes in $100 million in sales one year and, after subtracting expenses, keeps $20 million as its operating profit. Uncle Sam demands his share, in taxes. Corporate income tax rates can approach 40 percent. So perhaps $13 million will remain after taxes as net profit.

The firm has many things it can do with that money. If it pays out some of these earnings as dividends to shareholders, though, the shareholders will recognize them as income. This means Uncle Sam will claim a chunk of that personal income in taxes. VoilÀ — that money has now been taxed twice.