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In 1994, Bill Bengen published groundbreaking research that reshaped the way retirees approach their income planning. He introduced the 4% rule, which suggests that retirees can safely withdraw 4% of their portfolio in the first year of retirement and then adjust that amount annually for inflation.
This strategy is designed to help retirees sustain their savings and avoid running out of money over a 30-year retirement.
Thirty-one years later, Bengen — whose upcoming book, “A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More,” is set to be published later this year — now believes retirees can safely withdraw 4.7% of their portfolio in the first year of retirement, up from his original 4% rule, while still ensuring their savings last for 30 years.
However, before retirees blindly follow Bengen’s rule of thumb, he outlined in a recent episode of Decoding Retirement the eight key factors to consider when crafting a retirement income plan.
“A lot of folks get hung up immediately at the start with, what’s my number? Is it 4%? Is it 5%?” Bengen said (see video above or listen below). “And there’s a lot of things you have to look at before you can get to that point.”
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The first step in developing your personal retirement withdrawal plan is to select a scheme for withdrawing your money.
Most people don’t realize that the 4% rule — now upgraded to 4.7% — is based on a specific mathematical approach for withdrawing money in retirement that accounts for severe market downturns early in retirement, as well as historically high inflation periods, Bengen said. Under this rule, a retiree with a $1 million IRA would withdraw 4.7% in the first year, or $47,000.
After that, Bengen said the percentage is no longer used. Instead, withdrawals are adjusted annually based on inflation, much like Social Security. For example, if inflation were 10%, the next year’s withdrawal would increase by 10%.
This method, Bengen said, aims to maintain a retiree’s purchasing power over time. However, it’s just one of many approaches. Other strategies include withdrawing a fixed percentage of assets, using annuities, or front-loading spending in early retirement and cutting back after about 10 years. And each approach has different financial implications, he said.
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The second factor is determining your “planning horizon,” Bengen said. This is one of the most challenging aspects of developing a withdrawal plan, as it’s directly linked to your life expectancy as an individual and, if applicable, as a couple.
“You don’t necessarily want to plan to spend your last dollar with your dying breath because most of us can’t get that timing down,” he said.
And since it’s impossible to predict longevity with precision, Bengen said it’s wise to build in a margin of error — perhaps an extra 10 years or about 30% more than your expected lifespan.
Given increasing life expectancies, with many people now living past 100, he said it’s better to plan conservatively rather than risk running out of money in your 90s.
“You don’t want to readjust this somewhere in your mid-nineties,” Bengen said. “You’d want to take care of it when you retire.”
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The third key factor is whether you’re withdrawing from a taxable or non-taxable portfolio, as this can have a significant impact on your withdrawal rate, Bengen said.
The 4.7% rule assumes a non-taxable account, such as an IRA. However, if you owe taxes on your gains, interest, and dividends in retirement, it will erode your principal, ultimately reducing your sustainable withdrawal rate.
“My methodology assumes that the investment account used to fund withdrawals during retirement will pay all the income taxes generated by its investment income — realized gains, dividends, and interest,” Bengen explained in his forthcoming book. “For a tax-advantaged account, those taxes are zero by definition. I don’t concern myself with the taxation of withdrawals from such accounts, as this money has left the portfolio. Instead, I focus on what happens to funds while they remain within the portfolio.”
Because taxable accounts are subject to ongoing tax liabilities, retirees must account for how taxes will affect their withdrawal rate. “The higher the tax rate, the more of a penalty you pay in taxes,” Bengen said. “So you have to take that into account.”
The fourth key factor is whether you want to leave money to your heirs. An often overlooked assumption of the 4.7% rule, Bengen said, is that your portfolio balance will be zero by the end of your planning horizon — typically 30 years.
If your goal is to leave a substantial inheritance, he said, you’ll need to adjust your withdrawal rate accordingly. This often means withdrawing less each year, sometimes significantly less.
“There is a high price to pay to make your heirs happy, and you have to trade that off against making yourself happy during retirement,” Bengen noted. “That’s a discussion between you and your financial adviser.”
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Ultimately, he said, this is a highly personal decision.
“It’s a very individual thing, and every person has to make that decision for themselves,” he said. “But it’s a decision that has to be made — you just can’t leave it to chance. It will affect your withdrawal rate.”
How you structure your investment portfolio is another factor that plays a crucial role in determining your withdrawal rate, Bengen said.
His research suggests that keeping a stock allocation between approximately 47% and 75%, with the rest in bonds and cash, results in a sustainable withdrawal rate of about 4.7%. Straying outside that range, either by holding too few or too many stocks, however, can reduce your withdrawal rate.
In his research to develop the 4.7% rule, he used a well-diversified portfolio of seven different asset classes, allocated in a fixed manner over the course of retirement.
Additionally, he noted that while many retirees maintain a fixed asset allocation, other strategies — such as a rising equity glide path, where stock exposure starts lower and gradually increases — can actually improve withdrawal rates. And other methods, including guardrails that adjust withdrawals based on market conditions, offer alternative approaches to managing portfolio risk in retirement.
“There are so many ways to approach it — fixed allocations, rising glide paths, guardrails — but ultimately, it’s a decision every retiree must make,” he said.
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Bengen described the sixth important strategy, portfolio rebalancing, as one of the “four free lunches” available to retirees.
At its core, rebalancing involves periodically adjusting your portfolio back to its original asset allocation after a set period. Once per year is generally optimal, he said.
Beyond optimizing withdrawals, rebalancing is also a critical risk management tool.
“It’s important because it prevents the portfolio from getting overweighted in risky assets like stocks and getting so volatile that if you hit a stock bear market, it gets completely destroyed,” Bengen said.
Some experts argue that retirees should reduce their stock allocation as they age to lower portfolio risk, but Bengen’s research suggests otherwise. When testing different approaches, he found that reducing stock exposure during retirement actually lowers the sustainable withdrawal rate — the opposite of what many might expect.
“There are three choices: decrease stocks, maintain them, or increase them,” Bengen explained. “Of the three, the worst is to decrease your stock allocation.”
In his research, he found that decreasing your stock allocation reduces your withdrawal rate. “It’s the one thing you do not want to do,” Bengen said.
The next best is to maintain a fixed asset allocation during retirement. And the slightly better approach is to start with a slightly lower stock allocation — such as 40% stocks and 60% bonds — and gradually increase equity exposure over time, as this “rising glide path” can slightly boost withdrawal rates.
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Bengen’s research assumed that retirees invest in index funds, aiming to capture the market return for each asset class rather than outperform it. For example, if a portfolio includes an S&P 500 (^GSPC) component, the goal is simply to match the index’s returns — not to beat them.
However, for those confident in their investing skills, Bengen provides analysis in his book on how higher returns can affect withdrawal rates. He calculated how much a retiree’s withdrawal rate could increase for each additional percentage point of return — but also warned of the risks if those expectations aren’t met.
“Unless you’re an exceptional individual — and there are some who can beat the market — you may want to stick with index funds,” Bengen said. “If you fail to achieve your goal, your withdrawal rate will suffer, and that’s a real concern.”
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The final factor is when you want to receive your payments.
Many retirees prefer to receive withdrawals on a regular schedule, similar to a paycheck. In his research, Bengen assumed an even distribution of withdrawals throughout the year, which aligns with this common practice.
However, he also analyzed the impact of taking withdrawals as a lump sum, either at the beginning or end of the year, and found that this can significantly affect the sustainable withdrawal rate.
“If you take all of it out at the end or all of it out at the beginning, you’re going to have a different number,” Bengen explained. “It’ll be significantly different than the 4.7% or whatever number results from an evenly dispersed withdrawal pattern.”
Ultimately, retirement planning isn’t a “set it and forget it” process — it requires ongoing monitoring and adjustments to stay on track. Over a 30-year retirement, unexpected challenges are bound to arise, and how retirees respond to them can be just as important as the initial plan itself.
“A 30-year plan is going to encounter problems, just like anything else,” Bengen emphasized. “And how you deal with them is really important to the success of your withdrawal plan.”
Each Tuesday, retirement expert and financial educator Robert Powell gives you the tools to plan for your future on Decoding Retirement. You can find more episodes on our video hub or watch on your preferred streaming service.
