This dilemma has come up times and times again.
It seems like a paradox, because someone who retired at the peak of the market gets to withdraw much more than he could if he did at a market trough on the same portfolio.
Here are some actual numbers. On 10/9/2007, the S&P was at 1565. On 03/09/2009, the S&P was at 677! That's a huge drop of 57%.
Ignoring the bitty dividend, a $1M at the top of the market would become $430K later. So, if you retired at the bottom of the market, you could withdraw only 4% x $430K = $17K instead of $40K/yr.
So, how does one explain this paradox? It is actually quite simple.
If you look at all the squiggly lines that FIRECalc plots for any input parameter set, you will see that there's a wide range of outcome. Thirty (30) years from now, you may become a decamillionaire, or you may be totally broke.
If you take 4% at the top of the market, your portfolio may barely survive 30 years from now. But if you take 4% at the bottom of the market, you are most likely to die a lot richer than you are now. In either case, you've made it.
It's like a student passing a course with a grade A or a grade C. If you keep ratcheting your withdrawal when the portfolio goes up, you are increasing the chance that you will be barely solvent. You still pass the course, but instead of grade A, you will be sweating bullets barely making a C.