How golden will your golden years be?

Figuring out how much to withdraw each year from your retirement portfolio is probably the trickiest financial choice you will ever face. And today's lofty stock market makes the decision doubly difficult.Sure, the calculation seems straightforward. You start with some assumptions about investment returns and your life expectancy in retirement.

Let's say you expect stocks to gain 10 percent a year and bonds 6 percent. Also assume annual inflation of 3 percent and a 25-year retirement. If you hold 50 percent stocks and 50 percent bonds, you ought to be able to withdraw 6.7 percent of your portfolio's value in the first year of retirement. This withdrawal would come partly from dividends and interest and partly from selling securities.

Thereafter, even if you boost the sum you withdraw each year along with inflation, your money should last through a 25-year retirement.

Easy, right? Unfortunately not. "The vagaries of the market can wreak havoc with the best-laid investment plans," says Steven Norwitz, a vice president with T. Rowe Price Associates, the Baltimore fund company.

What to do? Here are five strategies for coping with Wall Street turbulence.

Don't expect history to repeat itself.

If you want to see how fickle markets can be, consider the past 25 years. According to Chicago researchers Ibbotson Associates, annual returns were fairly generous, with the Standard & Poor's 500-stock index gaining 13.1 percent, intermediate-term government bonds returning 8.9 percent and inflation climbing at 5.5 percent.

But for those who retired at the start of this 25-year stretch, it was a nightmare, because it began with the brutal 1973-'74 bear market. If you had begun the period with 50 percent in the S&P 500 and 50 percent in intermediate bonds, pulled out 6.7 percent in the first year and then stepped up your withdrawals with inflation, you would have been penniless within 13 years, T. Rowe Price calculates.

"If you start your retirement with a bear market, you wipe out a lot of capital before you really start withdrawing," says William Bengen, a financial planner in El Cajon, Calif. "The bear market is telling you that you're basing your withdrawals on inflated market values and you really need to reduce them."

Spread your bets.

Would a more broadly diversified portfolio have fared better? Let us say you still had a 50-50 mix of stocks and conservative investments but it was divvied up as 30 percent S&P 500, 10 percent small stocks, 10 percent foreign stocks, 35 percent intermediate bonds and 15 percent Treasury bills.

T. Rowe Price calculates that, with a 6.7 percent withdrawal rate, this better-diversified portfolio would have left you broke within 15 years, a tad longer than the less-diversified portfolio.

"What kills the portfolio is when inflation starts roaring," says Minneapolis financial planner Ross Levin. "You might substitute inflation-indexed bonds for some of the intermediate-government bonds. You might also put a small amount in some sort of hedge, like real-estate investment trusts."

Leave room for error.

One solution is to spend less right from the start of your retirement. T. Rowe Price figures that the more-diversified stock portfolio would have seen you through the last 25 years if you had used a 5.1 percent withdrawal rate.

A good idea? Keep in mind that you pay a steep price for this margin of safety. If you cut your withdrawal rate to 5.1 percent from 6.7 percent, that means an almost 24 percent hit in your standard of living.

Don't feed the bear.

As a compromise, you might start with a withdrawal rate closer to 6 percent, but be ready to slash your withdrawals if the market turns sour. Curtailing your spending, or taking on part-time work to earn extra money, is especially important if you get hit with a bear market early in retirement.

"That's the worst-case scenario," Bengen says. "You want to be conservative and cut back. It's the same thing any business does. If profits drop, they cut back on costs. You should do the same thing."

Bengen suggests you may want to trim your spending by as much as 20 percent until the rout is over and you have a better sense of the damage done to your portfolio. What if you don't scale back immediately? You will severely deplete your portfolio and will likely face more drastic cuts later.

Adopt a five-year plan.

Suppose you expect a 25-year retirement and you own an equal mix of stocks and bonds. To give yourself some margin for error, you opt for a 6 percent withdrawal rate.

Even if returns are neither surprisingly good nor surprisingly bad over the next five years, go back and review your spending strategy to make sure you're on track. Five years into your retirement, and with 20 years still to go, your withdrawal rate should equal about 7 percent of your retirement assets at that time; if you are spending more than that, look to cut back.

Another five years have passed? With a 15-year life expectancy, a withdrawal rate of 8.5 percent should be OK. "You've got to reassess periodically," Norwitz says, "or you risk running out of money."