Ask the Expert: Don't deplete 401(k) savings

I am 68 years old and plan to retire next year. I have about $100,000 in my 401(k) plan. I'll need about $1,500 a month from my 401(k), along with my pension and Social Security, to survive. Should I take a lump sum withdrawal or the amount I need monthly? What are the tax consequences?

Monthly withdrawals make more sense than taking a lump sum because 401(k) withdrawals are taxable. But you have a bigger dilemma: If you follow your current plan, your savings probably won't last as long as you do.

The average 65-year-old man lives 16 additional years. The average 85-year-old man lives to age 90. (In general, women live longer.) If you withdraw $1,500 a month, you'll empty your 401(k) in less than seven years, even assuming your investments earn 6 percent every year - and that's an optimistic assumption. Many experts anticipate investment returns below their historic averages in this decade, with stocks returning only about 5 percent a year, and bonds about 2.5 percent a year.

It's shocking how little you can withdraw annually in retirement without risking running out of money. Many people assume they'll earn a 10 percent average return on investments and can safely withdraw 6 percent of their savings each year. Unfortunately, there's a huge flaw in this reasoning: Even if you do earn a 10 percent average return, that doesn't mean you'll earn 10 percent each year. An average is only an average. In good years, your investments can earn more; in bad years, they can lose money.

The bottom line Financial advisers say a prudent withdrawal rate is about 4 percent of your original balance plus the inflation rate each year. If you start with $200,000 and the annual inflation rate is 2 percent, for example, in year one you'd withdraw $8,000, and in year two you'd withdraw $8,160.

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