The story is true, says Mark Wilson, a planner with Tarbox Equity in Newport Beach. "I had to tell him, 'That will only work if you live no longer than two years.' "

     Most people aren't so delusional, of course, but the episode serves to

Margaret Herron's portfolio, heavily weighted in tech, has plunged 31% this year. GERALDINE WILKINS / Los Angeles Times

highlight two issues all retirees need to consider: What investment mix do you need to achieve your financial goals in retirement? And how much of your portfolio can you safely draw down each year?

     The good news for many retirees and pre-retirees is that they've enjoyed the benefits of the stock market's surge in the 1990s. But now what? If your days of drawing a paycheck are over, your nest egg--along with any pension income and Social Security--will determine your lifestyle.

     You've got to decide how to protect that nest egg in what could be a stormy market environment, but still allow for growth. And you've got to decide how to pay yourself from the portfolio you've accumulated.

     Today, multiple careers, sliding retirement ages and new investment vehicles such as the Roth IRA are but a few of the factors that complicate retirement planning.

     For starters, the long-held notion that you will need just 80% of your pre-retirement annual income when you stop working rarely applies anymore.

     "That's only good for the sociologists and people with 1.8 parents and 2.3 children--not real people," says Harold Evensky, a financial planner in Coral Gables, Fla. "If anything, people end up spending more money in retirement because they have more time on their hands."

     Christine Fahlund, senior financial planner at T. Rowe Price Associates in Baltimore, notes that many people need to be flexible in their spending plans.

     "If you've always wanted to sail the intercontinental waterways or ride the elephants in Africa, you might be willing to spend more up front, then live on memories," she

Will Your Money Last? In retirement, how much should you withdraw each year from your investment portfolio to make sure it lasts? Measuring from 1926 to 1995, here's a look at how often a portfolio of 50% stocks and 50% bonds has successfully lasted for given time periods when money was withdrawn at a specific rate: Note: Assumes annual withdrawal sum is fixed at outset, but adjusted each year to keep pace with inflation. Source: American Assn. of Individual Investors

says. "But if you get serious about photography, you might need to set up a photo lab in the basement at some point."

     Some advisors recommend starting with a tiered spending plan, taking out more the first several years, for example, to pay for vacations. Wilson suggests clients budget separately for such costs, setting aside perhaps $30,000 as though it weren't retirement money.

     Aside from the question of living expenses, growing life spans warrant more bullish longevity estimates.

     "The planning community is starting to use the word '100' [as in living to it] for the first time," Fahlund says. "People should at least think out to age 90."

     When estimating your longevity, it pays to always add a few years, since you have a 50% chance of living beyond the life expectancy that an insurance company might apply to someone like you.

     Withdrawal Rates Affect Nest Egg's Span

     So let's say you've got an idea of what you'd like to spend in retirement. The next issue is: Can your portfolio provide what's needed?

     Financial planners say investors are often surprised to learn that portfolio withdrawal rates as low as 4% a year can raise the specter of a nest egg wipeout before 30 years--and that any withdrawal rate above 6% usually gets dicey.

     A 1998 study by three professors at Trinity University in Texas looked at how various withdrawal rates would have affected different portfolios over time, based on actual returns from blue-chip stocks and long-term, high-quality corporate bonds over the previous 70 years.

     The researchers found that the "safe" rate--the percentage that would allow the money to last the full planned withdrawal period, regardless of market conditions--has varied historically by the proportion of stocks versus bonds, the pace of inflation and, of course, how long the investor expected to live.

     Every portfolio mix, from 100% stocks to 100% bonds, survived all 30-year periods at a 3% withdrawal rate (meaning the same dollar amount, equal to 3% of the initial nest-egg sum, is taken each year).

     With withdrawals adjusted for actual inflation along the way, all but the 100%-bond portfolio survived any 30-year period.

     Of course, that's dandy for those with jumbo nest eggs--like a hypothetical retiree with $2 million who can live on $60,000, or 3%, a year. But most folks need more cash flow than that 3% rate would provide.

     Thus, in the real world, recommendations for withdrawal rates edge higher. "In general, studies conclude, you are pretty safe if the amount you withdraw from your nest egg, adjusted annually for inflation, amounts to no more than 4% of the initial value of your nest egg," according to the Institute of Certified Financial Planners.

     Yet Wilson says he uses 5% as a starting guideline, while Irvine-based financial planner Victoria Collins says she uses 6%, though both tweak the figures for the individual and explain the risks.

     Every percentage point packs a wallop: The Trinity study found, for instance, that a portfolio of 75% stocks and 25% bonds had an 85% chance of lasting 25 years at a withdrawal rate of 5% (adjusted for inflation). But the odds sank to 65% at 6%, and just 50% at 7%.

     The inflation adjustment is key. Since not even Alan Greenspan can predict the rate of inflation, advisors recommend using a figure such as 3.5%, which is somewhat higher than the historical average, when calculating your withdrawal plan.

     So if you have a $1-million portfolio and choose to take out 5% a year, you would plan to withdraw $50,000 the first year, $51,750 the next, and so on, to keep pace with living costs.

     Only those who have a lot of fixed costs or are otherwise likely to spend less as they age are advised to ignore inflation adjustments.

     Naturally, other income streams also are a crucial consideration in planning withdrawal rates--Social Security, for example, and any private pension.

     Tom Carter, a 55-year-old Torrance retiree, chose to take his entire pension over the next five years, covering him until age 60. Then he can tap his 401(k) savings at a safe withdrawal rate, which he will determine based on what happens with the stock market through 2005 and whether he opts to take Social Security at 62 or 65.

     Retirees bent on leaving a hefty inheritance might consider managing their portfolio like a university endowment, says Paul Merriman, editor of FundAdvice.com, a Seattle newsletter.

     Under this strategy, you plan to take out a fixed percentage of whatever your nest egg totals at the end of each year (as opposed to a percentage based on the initial portfolio). In dollar terms, therefore, your withdrawals fluctuate annually with the markets. Because you take out less after down market years, you give the portfolio a chance to recover and eliminate the odds of a wipeout, barring biblical-style disaster.

     Alas, this strategy is suited for retirees with more financial flexibility than most.

     Too Much Cushion Can Stunt Principal Growth

     Despite reminders from advisors about the need for continuing portfolio growth, many retirees and pre-retirees get nervous about their loss of earning power and psych themselves into a too-timid investment strategy with their portfolios.

     In a recent survey of older investors by financial-services firm American Skandia, nearly two-thirds of respondents say they thought they should be "mostly" in fixed-income investments rather than stocks.

     Yet many planners suggest keeping retirement-portfolio stock allocations close to 75% of assets, and no less than 50%, according to the Journal of Financial Planning.

     Fixed income investments, such as bonds, are a helpful cushion in moderation, but too much can be harmful because they provide little or no growth of principal.

     Of course, if a retiree has zero risk tolerance and sizable enough savings to generate the cash flow needed with no equity component, planners are happy to construct a diversified all-fixed-income portfolio.

     Bonds, bank savings certificates and money-market accounts might be boring, but they do provide interest income that many retirees come to appreciate. What's more, high-quality fixed-income investments might not rise in value, but neither do they lose much, typically (other than to inflation).

     The point is a stock mutual fund or individual stock can fall 50% or more in value in a bear market, and might never recover. An individual U.S. Treasury security, by contrast, is going to return its face value to you at maturity--and pay guaranteed interest along the way.

     If you want to limit the overall risk of loss to your nest egg, hold some fixed-income assets. FundAdvice.com says that between 1970 and 1999, a portfolio of 80% stocks and 20% bonds fell nearly 29% in value in the worst 12 months of that period. But a 50-50 portfolio in that period lost less than 16% in the worst 12-month stretch.

     Carter, who worked as an engineer at Hughes Space & Communications, is glad he put his faith in stocks, slotting most of his 401(k) investments to equities 15 years ago and watching the bull market run. Though he never planned to retire early, suddenly he could and did--evidence of the role luck plays before as well as after retirement.

     He now has a 75-25 mix of stocks to fixed income, but says he will scale back to 60-40 in the near future. "It makes me nervous to be hung out that much at this point in my life," he says of stocks.

     Carter also now shies away from individual equities. After buying shares of hand-held PC maker Palm Inc. at $70 apiece after the initial offering this spring and seeing them plunge to $20, Carter says, he will stick with mutual funds.

     Good Plans Are More Than Asset Allocation

     Experts say even retirees who have a well-thought-out asset allocation strategy can foil themselves in retirement planning with other common mistakes, including:

     * Overly high return expectations. Planner Wilson says people have gotten used to stock returns in excess of 20% a year. "They figure, 'To be conservative, I'll use 17% in my calculations,' " he says with a sigh. But to be truly conservative now--especially given the far-above-average market returns of the '80s and '90s--an investor might expect that stocks will return something closer to 9% a year in this decade, some pros say.

     * Forgetting the downside risks. Investors may be aware of the stock market's historical average returns but fail to take into account how vicious the downside can be in the short term.

     The 37% March-through-May plunge in the Nasdaq composite index ought to serve as a reminder.

     * Overlooking the details. Frank Glaser of Rancho Palos Verdes, a Hughes Aircraft retiree who informally helps friends with their retirement planning, stresses that portfolio projections should include all expenses ranging from inflation and investment transaction fees to the possibility of costly long-term care.

     Some investors also subject themselves to unneeded risk by neglecting to pay close attention to their portfolios, he says. "Their fixed income, for example, may not be as secure as they think unless it's in short-term, high-quality bonds or CDs. Often, brokers have put them into high-yield muni bond funds, which are really high-risk junk bonds" whose principal value can swing wildly.

     * Forgetting about Uncle Sam. "Clients sometimes think, 'Gee, I have $800,000.' Well, with 30% or more going to the government, they really only have $500,000," Evensky says, assuming that $800,000 is going to be withdrawn from tax-deferred accounts and taxed, or is in securities that must be sold and a capital gains tax paid.

     * Misunderstanding diversification. A Standard & Poor's 500-index fund might provide diversification among 500 blue-chip stocks, but portfolio diversification is a lot more than that, Merriman notes.

     He looked at a hypothetical retiree who started in 1970 with $1 million in the S&P 500 and used an aggressive strategy of 8% annual withdrawals, adjusting for inflation. The portfolio shrank to $559,000 by 1974. As Merriman put it, "This is where divorce happens." By 1984, the portfolio was toast.

     Granted, the early-'70s were a horrendous time for stocks. Still, when Merriman took the same portfolio in 1970 and made it globally diversified, including bonds and equity classes that move out of step with the growth-oriented S&P--such as international, "value" and small stocks--the portfolio made it intact through the 1990s.

     Merriman recalls consulting with a widow from Japan in the late 1980s who had $2 million in blue-chip Nikkei-index stocks. The Japanese economy was smoking, and she saw no reason to veer from the strategy that had served her husband well. Today, the Nikkei remains down more than 50% from its 1989 all-time high.

     "Diversification can be hard to accept," Merriman says, "but the evidence, based on market history, shows that it pays."