A Retirement Plan Isn't Just a Number: Strategic Withdrawals Can Make a Huge Difference

A major reason not to set your retirement plan on autopilot: sequence of returns risk. A flexible strategy with cash reserves and smart withdrawal moves can help ensure that a bad market doesn't sink your golden years.

By Mike Palmer, CFP

published 12 November 2025

in Features

A chessboard with a hundred-dollar bill on it between the white king (on its side) and the black king. — (Image credit: Getty Images)

Here's a startling truth: Two retirees with identical portfolios and withdrawal rates could experience the same average annual return and end up with vastly different outcomes.

In the worst-case scenario, one might run out of money, while the other sails through retirement comfortably.

This isn't a coincidence; it's a critical retirement threat known as sequence of returns risk.

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The problem with 'average' returns

Most investors know that the S&P 500 has averaged gains of about 10% a year in the long term, but that smooth average hides a bumpy road.

For instance, from 1995 to 2024, the S&P 500's annualized return was 10.9%. However, in only two of those 30 years did the market's return fall within two percentage points of that average.

This volatility is a minor concern during your working years when you're accumulating assets. But as you transition from a paycheck to living off your investments, market declines — especially early in retirement — can be devastating.

Consider the tale of two retirees, Bob and Joe. Both started with a $1 million portfolio and followed the same 4% withdrawal rule, adjusted for inflation.

Bob experienced a "favorable" sequence of returns, and after 20 years, he had more than $196,000 remaining in his portfolio.
Joe, however, experienced a "negative" sequence, with losses in the first three years of his retirement. Despite the same annualized return over the full period, Joe ran out of money in year 21.

Here's how 20 years unfolded in both cases:

Chart shows the difference in Bob's and Joe's money based on their withdrawal strategies.

Beyond the Monte Carlo simulation

Many advisers use tools such as the Monte Carlo simulations to illustrate the range of possible outcomes, but a simulation is not a plan. It's a single dashboard indicator, such as the speedometer on your car.

A true retirement plan is a dynamic strategy that requires continuous monitoring and adjustments.

Think of it as a football game. Good coaches don't just stick to the playbook; they make proactive adjustments based on the score, weather, injuries and the opponent's strategy.

Your retirement is the same. The rules of the game — the tax code, market conditions and your personal situation — are always changing. A flexible plan is your best defense.

Here's how you can reduce the sequence of returns risk:

Build a cash reserve. We advise clients to have 18 to 24 months of expected living expenses in cash or cash equivalents at the start of retirement. During a market downturn, you can draw from this reserve instead of selling portfolio assets at a loss.

In our earlier example, if Joe had forgone portfolio withdrawals during his first two years of losses, his outcome would have been completely different.

Use a reasonable, flexible withdrawal rate. Many retirees are familiar with the 4% rule, formulated based on research by Bill Bengen in the early 1990s. This rule states that you can take 4% of the initial portfolio value and adjust your annual withdrawals by inflation each year.

Bengen's initial research looked at 39 30-year periods covering 1926 to 1993 and had a 100% success rate using a 50/50 asset allocation. Bengen's latest research suggests a slightly higher sustainable withdrawal rate of around 4.7%.

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However, we often see clients use a fluctuating rate. For example, a retiree who delays Social Security until age 70 might withdraw a bit more in the early years of retirement, then drop their withdrawal rate once Social Security benefits begin.

Implement an efficient withdrawal strategy. A smart plan is about more than just a percentage. It's about drawing from the right assets, in the right accounts, in the right order. This means:

Selling winners, not losers: When you need to raise cash, you can sell from asset classes that have performed well to avoid selling at a loss.
Strategic tax planning: Tax laws change, and a good plan adapts. Recent tax changes, such as the enhanced deduction for people who are 65 and older, might make it more tax-efficient to draw more from your IRA than from a taxable account.

Sequence of returns risk is a very real challenge, but it's not insurmountable. The good news is that with a solid plan, you can significantly reduce its impact.

When it comes to retirement planning, a "set-it-and-forget-it" strategy is unlikely to work. It requires a disciplined process and continuous monitoring.

A good financial adviser acts as your financial coach, helping you make smart, informed decisions so you can navigate the bumps in the road and enjoy a secure, confident retirement.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Mike Palmer has over 25 years of experience helping successful people make smart decisions about money. He is a graduate of the University of North Carolina at Chapel Hill and is a CERTIFIED FINANCIAL PLANNER™ professional. Mr. Palmer is a member of several professional organizations, including the National Association of Personal Financial Advisors (NAPFA) and past member of the TIAA-CREF Board of Advisors.