It's really a little from column A and a little from column B.
In retirement you typically need a pretty steady income. The 4% safe withdrawal rate (or any other number you chose) is an estimate of what you would draw from your portfolio when you first retire. Now, overtime your withdrawal will like increase because of inflation, but your portfolio on average will as well.
Year-to-year, however, the value of your portfolio might vary wildly if you have a high allocation of stocks - and a 4% rate assumes that you do. So, after a market crash you might actually be drawing quite a bit more than 4% for a few years. The assumption is the portfolio value will start to recover over time. After a long run up in stock prices your portfolio might seem giant, and you'd really be drawing much less than 4%. But you are assuming the portfolio value is likely to crash back to earth at some point in the future.
So the 4% number is really just an estimation tool for you to decide how big a stash you need before beginning your retirement. You might say "I need 30K a year in which case I need a stash of 750K to start retirement". Over time you will draw 30K in inflation adjusted dollars - so 10 years hence you might be drawing 36K instead. During that time your portfolio value will go all over the place but you won't change how much you take out in inflation adjusted dollars. The key is that by doing back testing (looking at historical returns) and random testing (creating random futures based on the statistics of historical returns) we know that 4% withdrawal means that regardless of all the wild gyrations over time your portfolio will "survive" (i.e. not go to zero) in "most all" (e.g. over 95%) of the scenarios tested.
As to the mechanism by which you withdraw your 30K per year it doesn't matter too much, but the general idea behind portfolio theory is you would take any earnings beyond dividends and interest by selling the assets that are at the highest value in your portfolio. Some years you might not sell anything and instead need to decide what to buy with the dividends and interest you didn't need, other years you might need to sell quite a few things.
Clear as mud?