I was recently asked about the so-called 4-percent “rule.” That’s the rule of thumb that many financial consultants rely on as a formula for how much money can be withdrawn from retirement savings every year (generally adjusted for inflation) without running out of money. Of course, like so many of the “assumptions” about retirement, certainly in the aftermath of the 2008 financial crisis, that withdrawal rule of thumb has drawn additional scrutiny.

At the time, my comment was that the 4-percent guideline is just that – a guideline. What’s not as clear is whether adhering to that guideline produces an income stream in retirement that will be enough to live on.

How much are people actually withdrawing from their retirement accounts? At a recent Employee Benefit Research Institute Policy Forum, Craig Copeland, senior research associate at the EBRI, explained that the median IRA individual withdrawal rates amounted to 5.5 percent of their balance in 2010, though he noted that those 71 or older (when required minimum distributions kick in) were much more likely to be withdrawing at a rate of 3 percent to 5 percent (in 2008, that group’s median withdrawal rate was 7.2 percent, but in 2010, it was 5.2 percent), based on the activity among the 14.85 million accounts and $1 trillion in assets contained in the EBRI IRA Database. Will these drawdown rates create a problem down the road? Will these individual run short of funds in retirement?

At its core, once you stipulate certain assumptions about the length of retirement, portfolio mix/returns, and inflation, guidelines like the 4-percent “rule” are really just a mathematical exercise.

However, trying to live on the resources you actually have available in retirement is reality – and those post-retirement withdrawal decisions are generally easier to make when you’ve made good decisions pre-retirement.

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