Early market losses make retirement withdrawals harder

Bad market years early in retirement can make savings run out sooner because withdrawals remove money before it can participate in a recovery. This sequence-of-returns risk means that the same set of gains and losses can support different spending outcomes, even when their average return is identical.

Consider a hypothetical $1 million portfolio, a 20% loss, a 25% gain, and $40,000 withdrawn after each year’s return. With the loss first, the balance falls to $760,000 after the first withdrawal and finishes at $910,000; with the gain first, it moves to $1,210,000 and finishes at $928,000. Both paths pay out $80,000, but reversing the returns leaves an $18,000 difference in these calculations, which exclude inflation, taxes, fees, and other cash flows.

Without withdrawals, both sequences finish at $1 million because multiplying by 0.80 and 1.25 gives the same result in either order. With spending between returns, a rebound works on fewer dollars after an early loss; Schwab explains that raising a fixed cash amount at lower prices requires selling more investments. In the bad-first example, a 25% rebound cannot restore the original balance while also funding the second withdrawal, because some of the investments are already gone.

A percentage withdrawal rule changes where that risk lands. Taking 4% of the current balance after each return in our example leaves $921,600 in either order, but total withdrawals are $70,400 with the loss first and $88,400 with the gain first. Equal final balances have come with unequal income, illustrating Vanguard’s warning that percentage-based spending can fall short of living costs even while helping preserve the portfolio.

Flexible spending is useful only when the household can afford the adjustment. Separate essential bills from purchases that could wait, account for other reliable income, and test poor early returns alongside inflation, taxes, fees, and a longer retirement. A smoother assumed return hides this timing problem, while a plan requiring cuts below essential spending has shifted the shortfall into daily life.

Before choosing a withdrawal rule, test both the balance it preserves and the spending you could realistically live on after early losses.