What a 4 Percent Withdrawal Rate Looks Like During a Down Market

"For most people, the 4% rule sounds simple enough in that if you retire with $1 million, you can withdraw $40,000 in year one and adjust for inflation annually, and if you do everything right, your money should last for 30 years or so. Financial planners have long said this path is basically "settled science," supported by historical data showing it works in most scenarios."

"What the data doesn't always explain is what "most scenarios" actually means, or what happens in the kind of scenarios where the 4% rule simply won't work. It's very true to say that the 4% rule can fail, sometimes catastrophically so, if you retire right before a major bear market, and the mechanics of that failure aren't really obvious until you start working through the actual numbers."

"Let's say the market drops 30% in the first few years of your retirement. In these cases, you aren't just watching your net worth decline, but you're actively making the problem worse by selling depreciated shares to fund withdrawals. That combination creates permanent damage to your portfolio that even a strong recovery can't fully repair. Understanding what this looks like in real dollars, not theoretical percentages, is the difference between a plan that survives and one that runs out of money a decade too early."

The 4% withdrawal rule prescribes withdrawing $40,000 in year one from a $1 million portfolio and adjusting that amount for inflation annually, with the expectation that savings last roughly 30 years. Historical data show the rule works in most scenarios, but retiring immediately before a severe market downturn can cause failure. Early large losses force selling depreciated assets to fund withdrawals, locking in losses that even later recoveries cannot fully undo. Selling during declines combined with inflation-adjusted spending accelerates portfolio depletion. A numerical example shows a 60/40 $1 million portfolio dropping to about $960,000 after year one and to $816,000 after a 25% market fall, while required withdrawals rise with inflation.

Read at 24/7 Wall St.