Bill Bengen may not be a household name for many people. But mention the "4% rule" to any retiree or anyone saving for retirement, and chances are they'll know exactly what you're talking about.
First introduced by Bengen in 1994, the rule suggested how much a retiree could safely withdraw from savings in the first year of retirement — with a high likelihood the portfolio would last 30 years.
As Bengen explained in a recent interview, his original research was "a very simple attempt to find out, under the worst circumstances, what was the lowest safe withdrawal rate that historically an investor would have been able to take out for 30 years from an IRA account going back to 1926."
That figure, he found, was 4.15%. It was later rounded down to the now-famous "4% rule" in media coverage.
Fast-forward three decades, and Bengen has updated his research. In his new book, "A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More", he introduces the "4.7% rule."
While not an immutable law, this new guideline reflects a more diversified investment strategy — one that has been refined over years of additional research.
4% Rule Gets New Asset Formula, Too
The updated "standard configuration" portfolio includes 55% in stocks, equally divided among five asset classes:
- 11% U.S. large-cap stocks
- 11% U.S. midcap stocks
- 11% U.S. small-cap stocks
- 11% U.S. microcap stocks
- 11% international stocks
- 40% in intermediate-term U.S. government bonds
- 5% in cash, represented by U.S. Treasury bills
This broader diversification, combined with annual rebalancing, has helped lift the worst-case safe withdrawal rate from 4% to 4.7%.
Bengen noted that slightly overweighting small-cap and microcap stocks could "increase (the safe withdrawal rate) maybe a quarter of a percent, which is worth it."
But he cautioned, "You just don't want to go whole hog on those very volatile asset classes or else you'll work against yourself."
Read More About Coping With The Sequence Of Return Risk And How To Keep Inflation From Puncturing Your Plans
Why The 4% Rule For Retirement Was Updated
Practically speaking, if you retire with a $1 million portfolio, the 4.7% rule suggests withdrawing $47,000 in the first year. If inflation runs at 3%, the second-year withdrawal would increase to $48,410. Each year thereafter, withdrawals would be adjusted based on inflation. That would be regardless of how the market performs.
As Bengen explained, this method uses a "COLA scheme," or cost-of-living adjustment similar to how Social Security benefits are adjusted. It differs from strategies that withdraw a fixed percentage of portfolio value each year.
Inflation And Stock Market Moves Shape Withdrawals
Looking at current market conditions, Bengen identifies two factors that influence safe withdrawal rates: inflation and stock market valuations.
"Inflation causes you to raise your withdrawals," he said, "and the higher the valuation of the stock market, probably the closer we are to a bear market."
Today, Bengen sees inflation as "probably moderate," but stock market valuations as "very high."
He uses the Shiller CAPE ratio (Cyclically Adjusted Price-to-Earnings ratio) to measure valuations. He notes that while the historical average is about 17, today's CAPE sits in the mid-30s — roughly double the norm.
"I think if you get much above the low 20s, the risk starts to build," Bengen said, warning that historically, high CAPE ratios have not lasted long and typically preceded sharp declines.
Given these conditions, he suggests that a reasonable starting point for withdrawals today would be between 5.25% and 5.5%. While this is lower than the historical average withdrawal rate of nearly 7%, Bengen acknowledged that "you're giving up a lot, but those are the circumstances we face."
Withdrawal Rates In Retirement Can Be Flexible
Bengen emphasized that retirees aren't locked into their initial withdrawal rate. "It's always OK to adjust spending downward if you're feeling nervous," he said. Reducing withdrawals cannot worsen the situation and historically, there have even been opportunities to increase withdrawals significantly after periods of strong market performance.
For those especially worried about retiring during a period of high valuations, Bengen suggested it might make sense to delay retirement by six months to a year to see if valuations decline.
"Actually, the analysis I do in the book shows that it may pay to wait — if they can do it," he said.
Ultimately, while Bengen's updated 4.7% rule offers retirees a more generous and flexible framework than the original 4% rule, he stresses that it remains grounded in cautious assumptions. "The 4.7% is still a 'once-in-a-century worst-case scenario' number," he said, and retirees "should probably be more optimistic than that."
