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 Math Nobody Shows You: Selling Shares During Losses
Let’s start with concrete numbers: if you retired on January 1, 2026, with exactly $1 million in an invested portfolio composed of 60% stocks and 40% bonds. The plan would be to withdraw $40,000 in 2026, or $3,333 monthly, to cover all of living expenses, and in this first year, everything works out exactly as planned. You withdraw your $40,000, but fluctuations in your portfolio but ends the year at around $960,000 in withdrawals.
Fast forward to 2027, and the market has dropped by 25%, so your $960,000 portfolio is now worth $816,000, but you still need $40,000 for living expenses, which, adjusted for 3% inflation, now means you are withdrawing $41,200. This is where the math can get pretty ugly, in that if you need to generate $41,200 from an $816,000 portfolio, you’re withdrawing 5% instead of 4%. As you are selling shares at depressed prices, you’re now also liquidating more shares than you would have at the original portfolio value. In other words, if you were selling shares of a $100 stock that is now $85 after the market drop, you’re selling 485 shares instead of 412, and those 73 extra shares you sold are gone forever.
Now, we move into 2028, which brings another 10% decline in the market before things stabilize, so your portfolio is now roughly $697,320 after the decline, and you have to withdraw $42,436, again, adjusted for inflation. After this third withdrawal in retirement, the balance of your portfolio is now around $654,884, you’re now withdrawing 6.1% annually just to maintain the same spending power you had at retirement, and you’ve depleted almost one-third of your portfolio in just three years. Even if markets recovered strongly in 2028, you’re starting that recovery with approximately $655,000 instead of something closer to the $900,000 you should have, and the shares you have already sold can never be recovered from a compounding perspective.
Why the Recovery Doesn’t Save You
With a lot of the important math out of the way to help set the stage for what a 4% withdrawal can look like during a down market, it’s also important to understand why any recovery doesn’t immediately save you. The good news is that markets can and do recover, and that should be the message people take away, as stocks will return to previous highs, eventually, and likely surpass them.
Using the example from above, let’s assume that year 4, or 2029, brings a strong 18% market return and your account jumps from $655,000 to $773,000 before withdrawals. This sounds like great progress, but after you take out $43,709 for expenses, you’re back down to $729,291. Fast forward to 2030, and the market sees a 12% jump, so your portfolio is now back up to $817,206 before another withdrawal of $45,020, leaving you around $772,186. This sounds like a good recovery, but consider where you would have been if you had better timing.
Had you started at $1 million in a strong market, even after taking the same inflation-adjusted withdrawals, you would have roughly $180,000 more in your portfolio after the same five-year period. If these two scenarios moved forward simultaneously, experiencing identical returns for the next 25 years, the gap would never really close. By year 15, the unlucky retiree would have around $650,000, while the lucky retiree would have $900,000. After 25 years, the numbers would have the unlucky market retiree running low on funds, while the luckier retiree who entered with a strong market showing would have somewhere around $750,000 remaining in their portfolio.
This is why the 4% rule has a failure rate at all in that average returns can be sufficient, but bad returns matter more than the average, and there is no way to predict or control market timing. For most people, this should translate to holding at least 2-3 years’ worth of living expenses in cash or short-term bonds for emergencies. Using the unlucky retiree scenario above, if they had a $120,000 cash buffer and avoided selling equity shares during the first three years of the downturn, they would have seen their portfolio recover in a more meaningful way, dramatically impacting the 25-year scenario.
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