Is Your Retirement Money Really Liquid? What Traditional Planning Never Quotes You

Traditional planning sold you access to your money. Nobody quoted you what using it does to your retirement paycheck.

What were you told about why your money belongs in the market?

Can I ask you what reason you were given?

For a lot of people, it comes down to liquidity. People always want to make sure they have access to their money. Which is understandable. It is yours. You want to be able to get to it when you need it.

Maybe a better question would be, what do you think you’d need to access your money for? Next, how much do you think you would need access to?

I’ve had people tell me they want access to all of it. Well then, leave it in cash, maybe under your mattress. Can’t be more liquid than that, right?

Okay, that wasn’t nice, but it emphasizes the point.

What would require you to have access to all of your money?

If you did access it, what would that do to your retirement plan?

If you want true liquidity, put it in the bank. What is the problem there? Probably not earning a lot, so all the money you put there wouldn’t have much of a chance to grow.

Which is why so many end up putting their money in the market, pretty liquid and has the chance to grow.

That is a real feature, and while you were building the account it was the right answer. Money you are not living on can sit pretty much anywhere and stay available.

Retirement changes what that word means, and you almost never get any kind of notice about it when it happens.

In retirement is when you’ve actually given that money a job. Doesn’t it need to produce a paycheck for as long as you live, no matter how long that is? Traditional planning’s staple for retirement income is the 4% rule. Notice that the number has already moved. Bengen, the man who wrote it, now says his 4% rule has morphed into a 4.7% rule.¹ Whichever version you were handed, the 4% rule, the 4.7% number, the guardrails, the withdrawal schedule, every one of them only works if the full balance stays invested and stays the size the math assumed.

As long as you live can be a very long time. J.P. Morgan gives a non-smoking 65-year-old woman in excellent health a 54% chance of reaching 90 and for a couple the odds one of them reaches 95 are 44%.² Every one of those rules was tested to 30 years, so it is worth seeing how long the job actually runs.

Here is something the industry won’t tell you. The moment your money is pledged to producing your income, taking it out is not access. It is some form of a pay cut you gave yourself, and you are the only one who does not get told the number.

The withdrawal they never priced for you

Take $50,000 out of a $500,000 stock and bond portfolio. Your balance is $450,000.

If your income is calculated as a percentage of what you have, didn’t your income just fall at least 10%? Why? Doesn’t that $50,000 you just “accessed” stop growing too? Does it stop someday? Doesn’t it stop the very minute it leaves your account?

The 4% rule and the other safe withdrawal rules, say you can take 4% in the first year, give yourself a raise for inflation each year after, and have a good chance of not outliving your money. It never really asks what your balance is doing. Take the $50,000 out and the assumption is your income number next year doesn’t change. Under the 4% rule there aren’t any clearly defined guardrails telling you to reduce your income. What has changed is that the same paycheck now has to come out of a smaller account for the rest of your life, and nothing in the plan recalculates the year it runs dry. Typically, you’d find that out later in life. Isn’t that too late?

What is more likely to happen is you’ll see your balance has gone down a lot, and you’ll start wondering if you can keep spending that much and not outlive your money. Without any real guidance on what to do, you’ll likely end up reducing your spending on your own.

Here’s a question seldom asked… Is that how you would define a successful retirement?

You did not avoid the cost. You deferred finding out about it.

Ask the person who sold you that plan to put the new number in writing the day you take the withdrawal. Watch what happens.

Their own researchers already published the cuts

None of this is our math. It comes from sources and research inside traditional planning, about traditional planning.

Kitces and Income Lab ran the popular guardrails withdrawal method through four hard markets.³ It called for spending reductions of 28% for someone retiring in 2007, 36% for 1999, 45% for 1936, and 54% for someone retiring into the 1965 stagflation years.

Wade Pfau found that starting at a 5.3% withdrawal rate carried a one in ten chance of a 48% income cut within ten years.⁴

Even Bengen, who wrote the 4% rule, has since raised his own number to 4.7%.¹ A higher starting number does not remove the cuts. Wouldn’t it just start you closer to the cuts?

Read those percentages again as what they are. Every one of them is a liquidity event you did not choose and were not asked about. The market took the withdrawal for you, and the plan called it a spending adjustment.

If a market loss can necessitate a spending cut, couldn’t money YOU take out of your account, because it is “liquid”, necessitate a spending cut too?

What did all that liquidity actually buy you?

Your withdrawal shrank the account. How many of your bills did it shrink?

Does the house cost what it cost last month? Does the trip you promised yourself cost what it costs? Does flying out to see the grandkids while you can still keep up with them cost what it costs?

What got smaller was your account balance and the income derived from that shrinking account balance. Is that really liquidity or is it more like a guaranteed income cut?

The plan told you the money was available. It never told you that using it comes out of the life the money was supposed to fund, or that a bad decade takes the same cut without asking your permission.

Which part of that was the feature?

Are annuities liquid?

Fair question to turn around on us, and the answer is only partly.

An income annuity gives you access to about 10% of your account value a year with no penalty during the surrender period. Take it, and your guaranteed income drops by that same 10%. Take more than the free amount and a surrender charge could apply to the excess withdrawal, which drops the income further.

That is less access than a brokerage account, and nobody should pretend otherwise. It is not zero either.

Look at what just happened in both plans though.

Pull $50,000 out of the portfolio and your income falls at least 10%. Nobody tells you. There is no letter, no new number, no recalculation.

Pull $50,000 out of the annuity and your income falls 10%. The insurance company tells you the exact figure before you sign up for the policy, and it is written into the contract.

Same cut. One difference.

Both plans charge you for liquidity. Only one of them shows you the invoice.

Which overall plan actually leaves you more access to your money?

With lifestyle-first planning we never use all of your money. We look at the amount that produces the income for the life you actually want, covering your essentials, your adventures, your experiences, and the memories with loved ones you refuse to skip, as long as that amount fits into the suitability piece from the life insurance industry and company. If it doesn’t, we adjust it accordingly.

Suitability is the industry’s word for those limits, and they are not our rules. No insurance company will let you put all of your money into an income annuity.

The rest goes into a growth account. That growth account is where your liquidity lives, and the key part to keep in mind is that your income does not depend on this money. You are never forced to sell into a down market to eat. Money you are forced to tap at the wrong time was never really liquid. It was only available.

We ran the S&P 500 daily closes back to January 1950. The index finished lower than the day before on 46.2% of all trading days, and no decade in that stretch came in under 43% or over 49%.⁵

Liquidity means you can sell any day the market is open. It does not mean you get to pick what kind of day it is. You can pick the date. You cannot pick what the market did the night before, and you will not know until you go look.

The bigger version of that is what happens inside the year. We took the largest fall from a high to a low in every calendar year since 1950. It averages 13.7%, and there has not been a single year without one. Even in the 55 years that finished higher, the market still fell 10.4% along the way.⁵

So for a good stretch of most years, the account you would be selling out of is worth less than it was a few weeks earlier. The money is still available. It is just worth less on the day you go to get it, and nothing about the word liquid ever warned you about that.

Let’s say you need a new roof that will cost you $20,000. You look at your growth account, but the market is down which makes you apprehensive about pulling that $20,000 out right now… but you need the roof.

What do you have in your favor? A monthly income covering your essentials and your non-negotiables. With a small portion of that income, could you maybe finance the costs of that roof for a while? Until the market rebounds enough to where you’re comfortable taking the money out to pay it off?

Since you’re not going to keep the debt for the length of the loan anyway, could you get a longer term loan to keep the payments lower? Yes, you’ll have a new bill (for a while), yes you’ll be paying interest (for a while), maybe not ideal, but is that the end of the world or just a small inconvenience? ($20,000 for 15 years at 9% is $202.85 per month). Say it took a year for the market to correct. You would have paid $2,434.20 in payments, your balance would be $19,338.97, a $661.03 reduction in your balance… your interest costs were $1,773.17.

Does that wreck your retirement? Does a $202.85 monthly payment take away any trips you’d planned? What does it really cost you? A night out a month maybe. But what it didn’t cost you was taking $20,000 out of your growth account when the market was down, making the balance drop even further and taking a lot longer to recover.

If the market rebounded by 9%, your $20,000 that you left in the account would have earned $1,800 that year.

Be straight with me… which was the better situation? Is “liquidity” the only solution to a relatively immediate need for cash?

Another way to look at it is… what is likely the most money we’d need in an emergency? $20,000, $25,000, maybe $50,000? Okay, you could put $50,000 in the bank or $20,000 or $25,000 if that made you feel better. Just remember, the growth potential for all the money in the bank is typically significantly less than the growth potential in a market based account, invested aggressively for long-term growth, where you know you won’t be forced to withdraw money to eat when the market is down.

Okay, you’ve seen some options… which one leaves you with more access, traditional plans or Lifestyle-First planning?

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How much can you take out of an annuity without a penalty?

Most contracts let you withdraw 10% of your account value each year with no penalty. A few allow 5%. Some do not permit it during the first contract year, but every contract I have seen allows it from year two on, for as long as there is money left in the account value.

Take out more than that free amount and a surrender charge applies to the excess.

The penalty is not the only cost, and the other one applies whether you stay under the limit or not. Any withdrawal lowers your guaranteed income, proportionally. Pull out 10% of your account value and your income for life drops 10%.

Keep in mind, if this is pre-tax money, think (401k/IRA type money for the most part), if you take money out before age 59½ the Internal Revenue Service will charge you an additional 10% penalty, plus the taxes on the full withdrawal.⁶

This describes a fixed indexed annuity with a Guaranteed Lifetime Withdrawal Benefit, the kind that keeps an account value you can withdraw from. An immediate annuity works differently. You exchange the money for the income, and there is no account value left to reach.

Some immediate annuity contracts do leave something behind. If you choose life with a ten-year period certain and die in year five, your heirs receive the remaining five years of payments. That is more of a death benefit, not access. You still cannot get to that money while you are alive, so it does not change the liquidity answer.

What is an annuity surrender charge?

A fee the insurance company applies when you take out more than your penalty-free amount before the surrender period ends. It comes off the amount above the limit, not off everything.

The charge typically shrinks every year you hold the contract. A typical schedule starts around 10% in the first year and steps down by roughly one point a year until it reaches zero.

This is one hypothetical example of how a surrender schedule declines, not a standard. Schedules vary by carrier and by contract. Some hold the same higher percentage for the first two or three years before stepping down. Whatever contract you are looking at, the exact schedule is written into it, and we go through it with you before anything is signed.

The surrender charge is not the only cost. Two other things can change what you actually receive, and like the surrender charge, both apply only if you close the contract or take more than your free withdrawal amount.

A market value adjustment. Many contracts carry one, though not every state allows them. It can add to your amount or subtract from it depending on where interest rates sit now compared to where they were when you bought the contract. There is a full explanation in the questions at the bottom of this page.

A bonus vesting schedule. Some contracts pay a bonus, and a bonus can have its own vesting schedule. On many income contracts the bonus sits in the income value rather than the account value, so it does not affect what you would receive on a surrender. Where a bonus does sit in the account value, the unvested portion can be reduced if you surrender early. Your contract says which kind you have, and we go through it with you.

Add those three together and you have your surrender value, which is the real number to ask about. Not the charge by itself.

How long does the surrender period last?

Ten years is common, and the contracts carrying a ten-year schedule are usually the ones paying the best income. Shorter schedules exist and generally pay less. Longer schedules may pay more.

Once the period ends, the surrender charge is gone. The proportional cut to your income does not go away, because that has nothing to do with the penalty.

What does a withdrawal actually cost you?

If you think you may need to pull money out of the amount you set aside for income, do not set it aside. Or set aside less.

This is probably a ridiculous question to ask. If you’re implementing a lifestyle-first retirement plan, building lifelong income, on many contracts with a Guaranteed Lifetime Withdrawal Benefit, whatever is left in your account balance at death passes to your heirs without a surrender penalty. That applies to you and to your spouse if you’re married. It is not every contract. A life-only payout leaves nothing behind, and that is worth asking about by name before you sign anything.

So why would having a surrender charge, no matter how long, really matter?

Contract features described here are typical and vary by carrier and contract, confirmed as of August 2026. Figures are illustrative and hypothetical. Guarantees rely on the claims-paying ability of the issuing insurance company. Educational only, not tax, legal, or individualized investment advice.

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Sources

1. William Bengen, “The 4% Rule,” the author’s own page for A Richer Retirement, Wiley, 2025. Bengen writes that since 1994 his “4% Rule” has morphed into the “4.7% Rule,” which is the change this page describes.
2. J.P. Morgan Asset Management, Guide to Retirement, slide 4, Life expectancy probabilities. For a non-smoker in excellent health who is age 65 today, the chart gives a woman a 73% chance of reaching 85, 54% of reaching 90, 30% of 95 and 11% of 100, and gives at least one member of a couple 90%, 74%, 44% and 16%.
3. Derek Tharp and Justin Fitzpatrick, “Why Guyton-Klinger Guardrails Are Too Risky For Most Retirees,” Kitces.com, March 27, 2024. The historical simulations that put inflation-adjusted spending 28% below plan for a 2007 retirement, 36% for 1999, 45% for 1936 and 54% for 1965.
4. Wade Pfau, 2015 analysis of withdrawal decision rules, reported in the Kitces article above. Pfau found that a 5.3% initial withdrawal rate carried a 10% chance of a 48% pay cut within ten years.
5. KJ Financial calculation from S&P 500 daily closing prices, January 3, 1950 through August 28, 2026. Two calculations from the same data. First, across 19,285 day-over-day closing changes the index finished lower than the prior close 8,911 times, which is 46.2%, higher 53.1% of the time and unchanged 0.7%, with every decade between 43.1% and 48.7% down days. Second, taking the largest peak-to-trough fall inside each calendar year and averaging across all 76 complete years from 1950 through 2025 gives 13.7%, with a decline occurring in every one of those years and no exceptions; in the 55 years that finished higher the average largest fall was still 10.4%. Both are measured on closing prices, which understates the true fall because a closing price misses the low the market touched during the day. Yahoo carries actual daily highs and lows only from January 2, 1962; measured that way, 1962 through 2025 averages 15.8%. Each year’s return is measured from its first close to its last close, the same window as the fall.
6. Internal Revenue Service, Topic no. 558, Additional tax on early distributions from retirement plans. The IRS rule imposing a 10% additional tax on distributions from a qualified retirement plan or deferred annuity contract taken before age 59½, equal to 10% of the portion of the distribution includible in gross income.
7. Internal Revenue Service, Publication 590-B, Distributions from Individual Retirement Arrangements. The IRS publication stating that required minimum distributions must begin at age 73 for anyone reaching 72 after December 31, 2022, that age 70½ applied for tax years 2019 or earlier, and that qualified Roth distributions are not taxable.
8. SECURE 2.0 Act of 2022, Section 107, in Public Law 117-328. The statute setting the applicable age at 73 for a person who attains age 72 after December 31, 2022 and age 73 before January 1, 2033, and at 75 for a person who attains age 74 after December 31, 2032.
9. Internal Revenue Service, Publication 575, Pension and Annuity Income. The IRS rule that a withdrawal from an annuity under a nonqualified plan is allocated first to earnings, the taxable part, and then to your cost, the tax-free part.

Every figure on this page was read against the source listed above it on August 30, 2026.