See how return order changes results when withdrawals occur. Separate essential spending from realistic adjustments and coordinate reserves, accounts and taxes.
August 25, 2025 · Financial Forte Staff
Historical article: prepared retrospectively using information available as of August 25, 2025.
A withdrawal percentage can provide a starting point for retirement planning. It cannot tell you how the plan will respond when markets fall early, expenses rise or a family need appears. Once investments are helping pay the bills, the timing of returns and withdrawals becomes part of the decision.
Build flexibility around the amount you need, the income you can rely on and the spending you could realistically change. A useful withdrawal plan explains how to respond to difficult conditions. It does not rely on a single percentage as a guarantee that the money will last.
Separate essential spending from adjustable spending
Start with expenses that must be covered and income available without selling investments. Housing, food, healthcare and required debt payments may leave less flexibility than travel or optional gifts. The categories are personal; an expense should not be labeled discretionary merely because another household would spend differently.
Suppose a household has $70,000 of annual spending and $40,000 of reliable after-tax income in this hypothetical example. Its initial portfolio need is $30,000 before any taxes on withdrawals. Assume $60,000 of the spending is essential and $10,000 is genuinely adjustable.
The essential gap is $20,000: $60,000 less $40,000. That does not make the other $10,000 unimportant. It identifies where a change might be possible if conditions require one. The household should decide in advance which expenses it would reduce and which it would preserve.
A plan that assumes every expense can fall by 20% may look resilient on paper while being impossible to follow. Use changes that the people involved would actually consider, and include the tax cost of producing the required net spending.[1]
See why the order of returns matters
Suppose the household begins with a $500,000 portfolio. For a simplified two-year comparison, assume annual returns of negative 20% and positive 25%, with a $30,000 withdrawal at each year-end after the return is applied. Ignore taxes, fees and inflation. The returns are invented teaching assumptions, not a forecast.
With the decline first, $500,000 falls to $400,000. After the first $30,000 withdrawal, $370,000 remains. A 25% return in year two raises that to $462,500, and the second withdrawal leaves $432,500.
Reverse the same two returns. A 25% first-year return raises $500,000 to $625,000; the withdrawal leaves $595,000. The following 20% decline reduces that to $476,000, and the second withdrawal leaves $446,000.
The final balances differ by $13,500, even though the two percentage returns and the total $60,000 withdrawn are the same. Without withdrawals, either return order would bring $500,000 back to $500,000. The withdrawals create the difference in this example by changing the amount available for the next year's return.
Real retirement paths involve more years and more uncertainty. A later positive return is not guaranteed, and a two-year illustration cannot establish a safe lifetime withdrawal rate. It does explain why an average return alone is an incomplete planning assumption.
Define a response the household could carry out
Return to the decline-first case. Suppose the household reduces the first withdrawal to $25,000 by postponing $5,000 of genuinely adjustable spending. The portfolio would end the first year at $375,000 instead of $370,000. With the same assumed 25% second-year return and a $30,000 second withdrawal, it would finish at $438,750.
That is $6,250 more than the $432,500 result with both withdrawals fixed at $30,000. The improvement reflects $5,000 left invested plus $1,250 of assumed second-year return. In the first year, spending would fall from $70,000 to $65,000 under this adjustment. The household also gave up or delayed $5,000 of spending; the change is not a free financial gain.
The appropriate response could involve a different amount, a reserve, part-time income or another adjustment. Holding spending money in cash may reduce the need for an immediate investment sale, but cash has opportunity cost and purchasing-power risk. A reserve is part of the household's assets, not an extra source of wealth outside the plan.[2]
Write down the agreed review conditions and which person will initiate the review, rather than reacting to every daily move. A material change in the funded spending gap, portfolio value or health needs may warrant a new projection. The response should consider both the financial effect and the household's ability to live with it.
Coordinate withdrawals with accounts and taxes
The account used for a withdrawal can change the amount available to spend. Traditional retirement distributions, qualified Roth distributions and sales in taxable accounts do not all have the same tax treatment. Required minimum distributions and other account rules also need to be incorporated where applicable.[1]
Avoid assuming that one withdrawal order is always best. A decision that minimizes this year's tax may increase later taxes or reduce flexibility. Review the current and future income picture before making a large transaction.
Keep investment risk aligned with the plan as well. Diversification can spread exposure, and rebalancing can restore a chosen mix, but neither guarantees a recovery or protects every withdrawal from loss.[2]
The next step is a written withdrawal approach that identifies the initial spending need, the review schedule and the adjustments the household is willing to make. A percentage can remain one input. The practical value comes from knowing how the plan will respond when life and investment results differ from the original assumptions.
Related reading
- Why Withdrawal Order Should Be Reviewed Every Year
- Create a Retirement Paycheck Before You Leave Work
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Educational information, not personalized investment, tax, legal or benefits advice. Examples use hypothetical assumptions. Verify current rules and your circumstances before acting.
