Taking Money Out
Drawing down a portfolio is a different problem from building one, because the order of returns starts to matter. The same average return can produce very different outcomes.
MadStockAlerts Research · Updated August 29, 2026
What to take away
- Sequence of returns risk applies when money is being withdrawn, not while it is being added.
- A poor first few years is far more damaging than the same years later.
- Fixed-percentage and fixed-dollar approaches fail in opposite ways.
- Widely quoted withdrawal rates come from specific historical studies with specific assumptions.
- Flexibility in the withdrawal amount is the most effective single mitigation.
MAD Academy Training Video · 0:46
Order Matters More Than Average
When you are withdrawing, the sequence of returns changes the outcome — the same average return can leave you fine or leave you broke.
This lesson is part of a Stock Alerts + Tools plan.
Why order starts to matter
While money is being added, the order of returns is almost irrelevant to the final value: the same set of annual returns in any order produces the same result on a lump sum. Once money is being withdrawn, the order matters enormously.
The reason is that withdrawals in a down year sell more units to raise the same amount, permanently reducing the base that participates in any recovery. Two portfolios with identical average returns can end decades apart depending on whether the bad years came first or last.
This is the whole of sequence risk, and it is why a retirement plan is exposed to the first several years far more than to any other period. The same decline arriving ten years later is a much smaller event.
Scroll the chart sideways to see all of it.
- Bad years last
- Bad years first
The two withdrawal approaches
| Fixed dollar amount | Fixed percentage of the balance | |
|---|---|---|
| Income stability | Stable, which is the point | Varies with the portfolio, sometimes sharply |
| Risk of depletion | Real, and highest in a bad early sequence | Cannot deplete in principle, since it scales down |
| Behaviour in a decline | Withdraws the same amount from a smaller base | Withdraws less, automatically |
| What it fails at | Running out | Providing a predictable income |
The two fail in opposite directions, which is why most practical approaches sit between them: a base amount with adjustments tied to the portfolio's value, or a floor and ceiling around a percentage.
What the widely quoted rate rests on
A frequently cited withdrawal rate comes from historical studies of US market data over a specific period, assuming a particular allocation, annual inflation adjustments, a thirty-year horizon and no fees or taxes.
- Different countries' historical data produce materially lower safe rates than the US figure.
- The studies assume no fees; deducting a realistic fee lowers the rate.
- Taxes are excluded, and they are a real reduction in a taxable account.
- The horizon assumption matters: a longer retirement requires a lower rate.
- The result is a statement about the worst historical sequence, not a guarantee about future ones.
The rate is best understood as the output of a specific study rather than as a rule. It is widely repeated without its assumptions, and the assumptions are what determine the number.
What reduces the risk
- Flexibility: reducing withdrawals in bad years is the single most effective mitigation, and it is the one most often assumed away.
- Holding some years of expected withdrawals in stable assets, so that a decline does not force selling equities.
- Other income sources, which reduce the amount the portfolio has to produce.
- Keeping fees low, since a fee is a permanent withdrawal on top of the intended one.
This describes mechanisms rather than recommending a plan. Withdrawal strategy interacts with tax, account types and personal circumstances in ways that a professional is needed to work through.
Which account to draw from first
Where a portfolio spans account types, the order of withdrawals affects the tax paid over time. The conventional orderings are widely described and every one of them is situation-dependent.
| Consideration | Effect |
|---|---|
| Drawing taxable accounts first | Preserves tax-deferred growth, and can produce large required distributions later |
| Drawing tax-deferred first | Reduces later required distributions, at the cost of tax now |
| Filling lower brackets deliberately | Taking distributions up to a bracket limit rather than only what is needed |
| Required distributions | Not optional once they begin, which constrains the whole sequence |
This interacts with income-linked calculations including healthcare-related thresholds, and the interactions are the reason the general orderings so often fail to fit a particular situation. Nothing here is tax advice, and this is one of the clearest cases in the library for a professional.