Key Points

Retiring with $2 million in savings puts you in a strong position, in theory.
An early market downturn and sluggish recovery could put you at risk of depleting your savings.
It is important to take a flexible approach to retirement plan withdrawals and adapt to market conditions.

If you are retiring with $2 million, you might assume that you are all set money-wise. After all, that is a substantial sum. And given that many people retire with almost no savings, you should feel pretty confident in your financial situation.

But while retiring with $2 million does put you in a very strong position, it does not guarantee that your money will last as long as you need it to. Believe it or not, even a $2 million portfolio could end up getting whittled down to zero if you are not careful.

A poor start could derail your retirement

You may have trouble wrapping your head around the idea of a $2 million portfolio running out. But a down market early in retirement could easily set the stage for that scenario.

Say you start off with $2 million and use the popular 4 percent rule, which allows you to withdraw $80,000 a year from your portfolio. Now, imagine the market falls 30 percent during your first year of retirement, and your portfolio drops from $2 million to $1.4 million. If you take your planned $80,000 withdrawal, that represents about 5.7 percent of your balance.

That is bad enough. But what if the market takes a long time to recover from that 30 percent drop?

If your portfolio does not grow in the coming years but you keep selling $80,000 worth of investments plus inflation adjustments to keep covering your bills, you could end up spending your money at a faster rate than it is able to grow. And if that pattern continues for years, you could end up with a 6 percent withdrawal rate, 7 percent rate, or higher - rates that are typically not sustainable in the long run.

Over time, that could leave you completely out of money.

Flexibility on your part really matters

If you stick to a withdrawal strategy like the 4 percent rule or something similar and do not adjust your spending and withdrawals downward to account for market crashes, you could end up whittling down an otherwise robust IRA or 401(k) to nothing. The takeaway? Be flexible.

If your portfolio suffers a major decline, temporarily reducing discretionary spending could make a meaningful difference. That could mean delaying a large vacation, postponing a new car purchase, dining out less frequently, or scaling back on other nonessential expenses until the market recovers.

A $2 million portfolio should be able to support you throughout retirement in theory - even if retirement lasts several decades. But a willingness to adjust your spending and withdrawals could ultimately spell the difference between running out of money or not.