A friend presented me the following concept at work the other day. What if you retire and start taking from your retirement during down years of the market? By taking from your principal during a down year you forgo future growth from the lost principal. Whereas if you only take during positive years then your retirement could actually grow during retirement. Consider the hypothetical chart below.


That's all fine and good but it presents a few questions to me. If you don't take principal during down years of the market where do you get your income from? Should you have a large cash reserve? Should you have some other "safe" investment like a guaranteed bond or something?

Also, wouldnt target funds already take this into consideration since by the time you retire most of the money in that account would be in safer investments?