Ye know not what shall be on the morrow. For what is your life? It is even a vapour, that appeareth for a little time, and then vanisheth away. (KJV) James is rebuking confident business planning that leaves God out, not planning itself; the humility he demands is exactly what a withdrawal plan needs.
James 4:13-15Two retirees, the same returns, a different order
Both retire with $1,000,000. Both withdraw $50,000 at the end of each year. Both experience the same five annual returns (minus 20%, minus 10%, plus 10%, plus 20%, plus 30%) averaging 6% a year. The only difference is the order. Retiree A gets the bad years first; Retiree B gets them last.
| End of year | A: bad years first | B: good years first |
|---|---|---|
| 1 | $750,000 | $1,250,000 |
| 2 | $625,000 | $1,450,000 |
| 3 | $637,500 | $1,545,000 |
| 4 | $715,000 | $1,340,500 |
| 5 | $879,500 | $1,022,400 |
A gap of $142,900 after five years, from an identical set of returns.
Now the part that makes the point sharp: if neither retiree had withdrawn anything, both would have exactly $1,235,520. Order is irrelevant while you are saving. It becomes decisive the moment you are selling, because a withdrawal taken in a down year permanently removes shares that will never participate in the recovery. This is sequence-of-returns risk, and it is concentrated in roughly the first decade of retirement. Retirement is the one season where you genuinely cannot know what tomorrow holds (James 4:13-15) and, unlike in your thirties, cannot simply wait it out.
The 4% rule, and what it actually claims
William Bengen’s 1994 research, later reinforced by the 1998 Trinity study, found that a retiree withdrawing 4% of a stock-and-bond portfolio in year one and adjusting that dollar amount for inflation each year afterward would have survived essentially every historical 30-year window in U.S. data. Useful. Also frequently misused. What it is not: a guarantee, a law of markets, a statement about any other country’s history, or a plan for a 40-year retirement. It assumes you mechanically ignore markets and take the same inflation-adjusted amount whether your portfolio doubled or halved, which almost nobody actually does, and which is precisely the behavior that makes the early-years risk above so dangerous. Treat 4% as a starting estimate for turning a balance into an income, then plan to adjust. See also how much is enough.
Guardrails: deciding the rules before the bad year
Guyton and Klinger’s 2006 paper in the Journal of Financial Planning proposed the best-known flexible alternative. Instead of a fixed inflation-adjusted amount, spending moves inside pre-set bands:
- Capital preservation rule: if your current withdrawal rate climbs about 20% above where it started (because the portfolio fell), cut the dollar withdrawal by 10%.
- Prosperity rule: if the rate drops about 20% below the start (because the portfolio grew), raise the withdrawal by 10%.
- Skip the inflation raise after a losing year; suspend downward cuts in the final years of the plan.
Accepting those adjustments allowed materially higher starting withdrawal rates in their modelling than a rigid 4%. The honest caveat matters as much as the finding: when Kitces tested the rules through real history, the required cuts were severe: cumulative income reductions on the order of 28% through 2007 to 2008, 36% after the dot-com bust, and far deeper in the Depression and stagflation eras. Guardrails do not remove the pain; they schedule it, in advance, while you are calm. That is still a large improvement over improvising during a crash.
The cash buffer: the cheapest defense there is
If the danger is being forced to sell in a down market, the direct fix is not having to. Harold Evensky’s cash-flow reserve, dating to the mid-1980s and now widely called the bucket approach, does exactly this: hold roughly a few years of spending in cash and short-term bonds, spend from that reserve during bad markets, and refill it from the growth portfolio in good ones (Morningstar). The cash earns little. That is the price of the insurance, and the insurance is what keeps year-one losses from compounding into permanent damage. Joseph’s grain was stored during the plentiful years, not the lean ones (Genesis 41:35-36); a buffer built the year before retirement is worth several built the year after.
RMDs and the bill you did not choose
Traditional accounts eventually stop being optional. The IRS requires minimum distributions from traditional IRAs, SEP and SIMPLE IRAs, and employer plans like 401(k)s and 403(b)s beginning at a statutory age, currently 73 (SECURE 2.0 raises it to 75 for people born in 1960 or later), and changed by Congress more than once in recent years, so confirm yours at the IRS RMD FAQs rather than trusting any article. Roth IRAs are exempt during the owner’s lifetime, and since 2024 so are Roth balances in employer plans. Miss one and the excise tax is 25%, reduced to 10% if corrected promptly. The planning point is that RMDs are taxable income arriving on the government’s schedule, not yours, which is why the years between retiring and the RMD age are the window many people use for partial Roth conversions and for front-loading giving. Once you are 70½, a qualified charitable distribution can also send an RMD straight from an IRA to a charity without it ever counting as income; see tax-smart giving.
See a range of futures rather than one line. The honest picture is a spread of outcomes, not a projection. This is general education, not personalized advice; the decumulation years are where a fee-only planner most often earns their fee.
Try it yourself: open the interactive tool for this lesson.
Before you go
Check yourself
1Two retirees start with $1,000,000, withdraw $50,000 a year, and get the same five returns in opposite order. What is the gap, and what would both have without withdrawals?
After five years the retiree with the bad years first has $879,500 and the one with the bad years last has $1,022,400, a gap of $142,900 from identical returns. With no withdrawals both would have exactly $1,235,520. Order is irrelevant while you are saving and decisive once you are selling, because a withdrawal in a down year permanently removes shares that never join the recovery. That is sequence-of-returns risk, concentrated in roughly the first decade of retirement.
2What does the 4% rule actually claim, and what do the guardrails and a cash buffer change?
Bengen's 1994 research, reinforced by the 1998 Trinity study, found that withdrawing 4% in year one and adjusting that dollar amount for inflation would have survived essentially every historical 30-year U.S. window. It is a starting estimate, not a guarantee, not a law of markets, and not a plan for a 40-year retirement. Guyton and Klinger's guardrails cut spending 10% when the withdrawal rate climbs about 20% above its start and raise it 10% when it falls about 20% below; Kitces found the required cuts were severe in real history, so guardrails schedule the pain rather than remove it. A cash-flow reserve of a few years of spending lets you avoid selling in a crash, and Joseph stored grain in the plentiful years (Genesis 41:35-36).
3Required minimum distributions are optional until you need the money, and a Roth IRA is included. What does the rule actually say?
Traditional IRAs, SEP and SIMPLE IRAs, and employer plans such as 401(k)s and 403(b)s require distributions beginning at a statutory age: 73 for people born 1951 through 1959, and 75 for people born in 1960 or later, though Congress has changed it more than once, so confirm yours on the IRS RMD page. Roth IRAs are exempt during the owner's lifetime, and since 2024 so are Roth balances in employer plans. Missing one costs a 25% excise tax, reduced to 10% if corrected promptly. An RMD is taxable income on the government's schedule, so the years before it are the window many people use for partial Roth conversions and front-loaded giving.
Do this now
If you draw from a portfolio, write this year's withdrawal as a percentage of the balance; if not, write what 4% of the balance would be. Then write whether you have a cut rule decided in advance and how many years of spending sit in cash or short-term bonds. Decide the rule on paper before a bad year writes it for you.
Sources
- Wikipedia: 4% rule (Bengen 1994; Trinity study 1998)
- Guyton & Klinger, 'Decision Rules and Maximum Initial Withdrawal Rates,' Journal of Financial Planning (March 2006)
- Kitces: Why Guyton-Klinger guardrails can require severe spending cuts
- Morningstar: The Bucket Approach to Retirement Allocation (Evensky's cash-flow reserve)
- IRS: Retirement plan and IRA required minimum distributions FAQs