Building a portfolio is only half the journey. The harder, less-discussed half is spending it down — turning decades of savings into income that lasts as long as you do.
The decumulation problem
While saving, a market crash is almost good news — you buy cheap. But once you’re withdrawing, a crash early in retirement is dangerous: you’re selling assets at low prices and they’re not there to recover. Running out of money is the real risk, so retirees need a sensible withdrawal strategy.
The 4% rule
The most famous rule of thumb is the 4% rule: withdraw 4% of your portfolio in the first year, then adjust that dollar amount for inflation each year after. Historically, a balanced portfolio following this has tended to last around 30 years without running dry.
It’s a useful reference point — but emphatically a guideline, not a guarantee. It came from specific historical data, in a specific country, over specific periods. Future returns, your lifespan, and your spending could all differ.
Worked example: the 4% rule in numbers
Say you retire with a $750,000 portfolio.
Year 1 withdrawal = 4% × $750,000 = $30,000
The key detail people miss: in year 2 you don’t take 4% of the new balance — you take last year’s dollar amount and bump it for inflation. If inflation was 3%:
Year 2 withdrawal = $30,000 × 1.03 = $30,900
…and so on, regardless of what the market did. That inflation-adjusting is what protects your spending power. It also shows the rule’s weakness: if markets fall 30% in year one, you’re still pulling $30,900 from a shrunken pot — selling more of it at low prices. That’s why many retirees flex the rule, trimming withdrawals after a bad year rather than mechanically raising them.
Sequence-of-returns risk
The reason a fixed rule is shaky is sequence-of-returns risk: when good and bad years happen matters enormously once you’re withdrawing. Two retirees with the same average return can have wildly different outcomes if one hits a crash in year one and the other in year twenty. This is why flexibility — trimming spending in bad years — tends to beat a rigid percentage.
The takeaway
Spending a portfolio down is harder than building it. The 4% rule is a helpful starting reference — withdraw ~4%, adjust for inflation — but it’s a rough historical guideline, not a promise, and sequence-of-returns risk means flexibility matters. (This is education, not financial advice.)