How Market Volatility Changes Withdrawal Timing Decisions

• Sequence-of-returns risk causes identical portfolios with the same average returns to produce different outcomes based solely on the timing of gains and losses during withdrawal periods
• The traditional 4% withdrawal rule faces pressure during volatile markets, as withdrawing a fixed percentage during a 20% drawdown takes a disproportionately larger share of remaining assets
• A cash buffer covering two years of living expenses allows retirees to avoid selling equity positions during downturns, separating income decisions from market timing

Summary: Market Volatility and Retirement Withdrawal Timing

Key Market Data:

The S&P 500 experienced a dramatic 20% drawdown in early 2025, followed by a sharp 45% rally from April lows. Major indices showed recent declines: S&P 500 (-1.17%), Dow Jones (-1.62%), Nasdaq 100 (-1.47%), and Russell 2000 (-1.86%).

Main Concept:

The article focuses on sequence-of-returns risk—how the timing of market gains and losses during portfolio withdrawals significantly impacts retirement outcomes. Two identical portfolios with the same average returns can produce vastly different results depending on when gains and losses occur relative to withdrawal timing.

Critical Insights:

• The traditional 4% withdrawal rule faces challenges in volatile markets, as withdrawing during downturns depletes portfolios faster than they can recover
• Investors who sold during the early 2025 drawdown locked in losses, while those who held through captured the recovery
• Financial advisors increasingly recommend flexible withdrawal strategies that adjust based on market conditions

Risk Management Strategy:

A two-year cash buffer covering living expenses in high-yield savings accounts is identified as the most effective volatility mitigation tool. This approach allows investors to avoid selling equities during downturns, separating income decisions from market timing. Monthly dividend ETFs can provide supplementary income without requiring asset sales.

2026 Outlook:

Wall Street consensus forecasts modest single-to-low-double-digit returns with continued volatility expected in the first half, driven by elevated valuations, midterm election uncertainty, and questions about AI spending returns. The article emphasizes preparation over prediction for successful withdrawal management.