Excess Withdrawal Risk

Posted September 16, 2025, By Cole Ferrier

Key Takeaways:

• Excess Withdrawal Risk is the danger of spending down your portfolio too quickly, permanently impairing its ability to fund a long retirement.

• This risk is most acute in the first few years of retirement, where high withdrawals combined with a market downturn (Sequence of Returns Risk) can cause irreversible damage.

• The "4% Rule" is a well-researched starting point, suggesting a conservative initial withdrawal rate has a high probability of success over 30 years.

• Resilient solutions include dynamic "guardrail" strategies that adjust spending based on market performance and "bucket" strategies that protect near-term income from market volatility.

So far in our series, we've established that your retirement could be a long ultramarathon (Longevity Risk) and that you'll be running against the headwind of rising costs (Inflation Risk). Now we come to a risk that is almost entirely within your control, yet is one of the most common ways that a seemingly solid plan fails: Excess Withdrawal Risk.

If your portfolio is the engine that powers your retirement, your withdrawal rate is the throttle. Pushing it too hard, especially at the beginning of the race, can burn through your fuel too quickly and leave you stranded. Excess withdrawal risk is the danger of spending down your portfolio so aggressively that you permanently impair its ability to sustain you for the rest of your life.

From my engineering background, I see this as a critical system overload. A well-designed system has a safe operating capacity. Pushing it beyond that limit, even for a short period, can cause irreversible damage. A retirement portfolio is no different. Those first few years of retirement are when your portfolio is most vulnerable.

By the Numbers

• 4%: The "safe" initial withdrawal rate identified in William Bengen's seminal 1994 study, which found that this rate (adjusted for inflation annually) survived even the worst-case 30-year historical periods. (Source: "Determining Withdrawal Rates Using Historical Data," Journal of Financial Planning, October 1994)

• 96%: The percentage of historical 30-year periods in which a 4% withdrawal rate would have left the retiree with their original principal still intact, indicating it is often a very conservative rate. (Source: Michael Kitces, "The 4% Rule: The Easy Way to Tell If You Have Enough to Retire")

• -53.8%: The drop in the S&P 500 from its peak in October 2007 to its trough in March 2009. A retiree with a high withdrawal rate during this period would have suffered catastrophic portfolio damage. (Source: S&P Dow Jones Indices)

From the Case Files

To see the impact of withdrawal rates, let's follow two retirees, Aggressive Andy and Prudent Peggy. Both start with identical $1 million portfolios and retire just before a sharp two-year bear market. For this example, we will assume a consistent 3% rate of inflation and that all withdrawals are taken at the beginning of the year, before that year's market returns are applied.

• Aggressive Andy chooses a 6% withdrawal rate ($60,000) and plans to adjust it for inflation each year.

• Prudent Peggy starts with a 4% withdrawal rate ($40,000). Her plan includes a "guardrail" rule: she will skip her annual inflation adjustment following any year the market has a negative return.

Here is how their portfolios evolved over two difficult years:

• Year 1 (Market Return: -15%)

  • Aggressive Andy's Portfolio: He withdraws $60,000, and the remaining balance of $940,000 then declines by 15%, leaving him with $799,000. ($1,000,000 - $60,000) * 0.85

  • Prudent Peggy's Portfolio: She withdraws $40,000, and the remaining $960,000 declines by 15%, leaving her with $816,000. ($1,000,000 - $40,000) * 0.85

• Year 2 (Market Return: -10%)

  • Aggressive Andy's Portfolio: He takes a 3% inflation-adjusted withdrawal of $61,800. The remaining balance of $737,200 then declines by 10%, and his portfolio falls to $663,480. ($799,000 - $61,800) * 0.90

  • Prudent Peggy's Portfolio: She follows her guardrail rule and withdraws another $40,000. The remaining $776,000 declines by 10%, leaving her with $698,400. ($816,000 - $40,000) * 0.90

After only two years, Aggressive Andy's strategy has left him with $34,920 less than Prudent Peggy.

The long-term risk becomes clear when we look at Year 3. To keep up with inflation, Andy's next withdrawal must increase by another 3% to $63,654, which is now a very high 9.6% of his remaining portfolio. Because Year 2 was a down market, Peggy's guardrail rule requires her to skip the inflation adjustment again, keeping her withdrawal at $40,000. This amounts to a more manageable 5.7% of her portfolio. However, it should be noted that Peggy might have had to make real adjustments in her life to be able to control her spending without inflation adjustments. By sticking to her plan, Prudent Peggy preserved significantly more capital, giving her portfolio a stronger foundation from which to recover. Aggressive Andy's plan, however, has been put under considerable strain.

Understanding the Risk: Eating Your Seed Corn

The math behind this risk is deceptively simple. When you are accumulating assets, market volatility is your friend. A downturn allows you to buy more shares at a lower price. But once you start taking withdrawals, the dynamic flips. Volatility becomes the enemy.

This is because of the tight and dangerous link between excess withdrawals and Sequence of Returns Risk. If you retire and immediately face a bear market, selling assets to fund your lifestyle means you are liquidating more shares at low prices. Those shares are now gone forever and cannot participate in the eventual market recovery. It's the financial equivalent of a farmer eating their seed corn during a drought. By consuming the very assets needed for future growth, they guarantee a smaller harvest in the years to come.

The Impact on Your Plan: A Point of No Return

The primary impact of excess withdrawal risk is that it dramatically increases the probability of portfolio failure. The damage done in the early years can be so severe that the portfolio can never recover.

• Interaction with Longevity Risk: A high withdrawal rate is dangerous over a 30-year retirement; over the 40- or 50-year ultramarathon dictated by longevity risk, it's a near-certain recipe for failure. The longer your timeline, the more damage a bad start can do. This is a critical consideration for the FIRE community, where a 3.5% or even 3% withdrawal rate is often debated as a more appropriate starting point for a 50+ year retirement.

• The Multiplier Effect of Fixed Incomes: This risk is magnified if you rely on other income sources that do not have an inflation adjustment, such as a private pension or a fixed annuity. In this scenario, your portfolio is forced to do double duty. It must not only generate enough income to give itself a raise that keeps up with inflation, but it must also cover the purchasing power gap left by the pension that is losing ground each year. This added responsibility means that an even more conservative initial withdrawal rate is essential to prevent the portfolio from being overwhelmed by the combined demand.

• Shrinking the Asset Base: High withdrawals rapidly decrease the principal, leaving less capital to generate future growth and income.

• Forced Austerity: The most common outcome is not a sudden drop to zero, but a painful realization 10 or 15 years into retirement that the current spending level is unsustainable, forcing drastic and unwelcome lifestyle cuts.

Solutions & Your Risk Mitigation Toolkit

Unlike market performance or inflation, your withdrawal rate is a variable you can directly control. Building a disciplined and flexible withdrawal strategy is the most effective way to mitigate this risk.

• Tool #1: A "Safe" Initial Withdrawal Rate. The "4% Rule" is the most famous starting point. Starting with a conservative initial rate (in the 3.5% to 4.5% range for a traditional retirement) is the first line of defense. For early retirees with a much longer time horizon, a rate closer to 3.5% is a more prudent starting point.

• Tool #2: A Dynamic "Guardrail" Strategy. The biggest flaw in the simple 4% Rule is its rigidity. A more resilient approach is dynamic. A "guardrail" strategy sets rules for adjusting your spending based on portfolio performance. If your current withdrawal rate drifts too high due to a market downturn, you forgo your inflation raise or even take a small cut. This disciplined flexibility prevents you from selling too many assets after a crash.

• Tool #3: A "Bucket" Strategy. This is a powerful way to manage the psychology of market downturns. It involves segmenting your assets:

  • Bucket 1 (1-3 years): Holds cash and short-term bonds to cover near-term expenses.

  • Bucket 2 (3-10 years): A balanced mix of stocks and bonds.

  • Bucket 3 (10+ years): Your long-term growth engine, invested in equities.

  • Note: The sizes of these buckets and their holdings should be tailored to ones risk tolerance.

• Tool #4: Stress-Testing. Before you commit to a withdrawal strategy, you need to see how it holds up under pressure. We use Monte Carlo simulations to run your plan through thousands of different potential market scenarios. This gives you a probability of success, helping you understand how robust your chosen withdrawal rate is before your real money is on the line.

A Disciplined Framework for Spending

Strategically, excess withdrawal risk is the danger of violating your portfolio's sustainable capacity, drawing down principal so quickly that you permanently impair its ability to support you for a lifetime. This danger is most acute in the early years of retirement when high withdrawals collide with a market downturn—a bad sequence of returns—forcing you to sell more assets at low prices and causing damage from which the portfolio may never recover.

A resilient plan mitigates this with a multi-layered approach. It starts by establishing a conservative initial withdrawal rate to create a margin of safety. It then builds in disciplined flexibility through dynamic "guardrail" rules that adjust spending to market conditions, and protects near-term cash flow with a "bucket" strategy, ensuring you are never a forced seller in a down market.

Conclusion: The Great Balancing Act

Excess Withdrawal Risk is a self-inflicted wound, often stemming from overconfidence after a bull market. The great balancing act here is between your desire for a certain lifestyle today and the mathematical reality of what your portfolio can sustainably support for decades. A higher withdrawal rate feels good in the short term, but the trade-off is a significantly higher risk of failure in the long term. By starting with a conservative withdrawal rate and building in rules to adapt to changing conditions, you can gain control of the throttle and ensure your financial engine carries you safely through the entire ultramarathon of retirement.

Create Your Financial Plan with Us

A successful retirement depends on a sustainable withdrawal strategy. If you're unsure whether your spending plan is resilient enough to withstand market volatility, we can help. We use sophisticated tools to stress-test your plan and design a dynamic strategy that you can stick with. Contact us today.

Resources:

• FINRA (Financial Industry Regulatory Authority): Offers tools and articles for investors on managing retirement accounts and withdrawals. (www.finra.org)

• U.S. Securities and Exchange Commission (SEC): Provides investor bulletins and alerts on topics related to retirement savings and avoiding fraud. (www.investor.gov)