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Saving for Retirement

2. Set Your Budget

The possibility of running out of money is the main reason financial advisers such as Christine Fahlund, of T. Rowe Price, urge you to go slow, limiting your first year's withdrawals to 4% of your total retirement funds. Then you can raise the draw by 3% a year to cover inflation. If you start at $500,000, you can safely withdraw $20,000, or 4%, during the first year. Then you boost the second year's take to $20,600, the third year's to $21,200, and so on.

While that sounds conservative -- and it is -- there's a reason. The strategy is intended to help you survive should a bear market strike as you begin your retirement. On the other hand, if your investments perform well initially, you can reassess the situation after a few years and pay yourself more.

MAKE YOUR MONEY LAST

1. Get a Checkup

2. Set Your Budget

3. Do a Dry Run

4. Choose Your Date

5. Consider an Annuity

6. Roll It Over

Investing in Retirement

Extreme Early Retirement

Unfortunately, few prospective and current retirees are aware of these guidelines. A recent survey by New York Life found that only one in ten people could identify 4% as an appropriate initial withdrawal rate. Nearly half thought it should be more.

David Colescott is living proof that the 4% rule works. After retiring at age 65 in 1999, when the stock market was soaring, the Pinehurst, N.C., man enrolled in T. Rowe Price's Retirement Income Manager program. That was early in 2000, just before the three-year bear market began. Even though his portfolio took a hit during those down years, he's been able to recover and give himself a raise every year since. He has no concerns about outliving his money.

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Colescott, who is a former Marine and international communications consultant, calculates that even if his investments don't earn another dime -- which is unlikely because he has 60% in stock funds and 40% in bond funds -- he'll still be able to withdraw money at his current rate for another 15 years. Colescott's advice: Be cautious with your withdrawal strategy but not too timid with your investments because you'll need some growth to sustain you through a retirement that could last for decades (see the model portfolios).