The 4% Rule Updated: New 4.7% Safe Withdrawal Rate

The Popular 4% Rule for Retirees Just Got an Update

William Bengen’s popular retirement withdrawal rate just received a significant upgrade. The financial planner who introduced the famous “4% rule” in the Journal of Financial Planning in 1994 has now increased his recommendation to 4.7%, offering retirees a potential 17.5% boost in their safe withdrawal rate. This update represents a major shift in retirement planning strategy that could substantially improve financial outcomes for millions of retirees.

Bengen’s original research found that retirees could confidently withdraw 4% of their portfolio in the first year of retirement, then increase that dollar amount each subsequent year to keep pace with inflation, while maintaining the purchasing power of their withdrawals throughout a 30-year retirement. This straightforward approach quickly became the default strategy for many retirees seeking to ensure their savings wouldn’t run out. Nearly three decades later, it remains one of the most widely cited and trusted retirement planning benchmarks.

Understanding the Original 4% Rule

The 4% rule was groundbreaking in its simplicity and research-backed approach. For retirees struggling with the fundamental question of how much they could safely spend from their accumulated savings, Bengen’s work provided a clear answer. A retiree with a $1 million portfolio could withdraw $40,000 in the first year. Each subsequent year, they would increase their withdrawals by the inflation rate, ensuring their spending power remained consistent throughout retirement.

What made Bengen’s original analysis compelling was its historical foundation. He examined market returns dating back over a century, stress-testing his withdrawal rate against the worst-case scenarios in stock market history. By identifying the most challenging periods—including the Great Depression and severe bear markets—he determined that a 4% withdrawal rate would have sustained a 30-year retirement even during the most unfavorable conditions.

The Updated 4.7% Safe Withdrawal Rate

In his new book, A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More, Bengen reveals that the safe withdrawal rate is actually closer to 4.7%. This means a retiree with a $1 million portfolio could spend $47,000 instead of $40,000 in their first year of retirement, then adjust this amount annually for inflation to maintain purchasing power.

The increase from 4% to 4.7% represents a meaningful financial difference for retirees. This 0.7 percentage point increase translates to approximately $7,000 more in annual income for every $1 million in retirement savings. For a retiree with a $2 million portfolio, this difference amounts to $14,000 per year—or $420,000 over a 30-year retirement without accounting for inflation adjustments.

What Changed in Bengen’s Analysis?

The foundation of Bengen’s updated withdrawal rate lies in more sophisticated research methodology and expanded portfolio diversification. As he explained to Yahoo Finance, his previous analysis focused narrowly on portfolios composed primarily of U.S. bonds and large U.S. stocks. His updated research incorporates a significantly broader range of asset classes, including international stocks and equity positions in small and mid-size companies.

This expanded asset universe creates what Bengen describes as a more resilient portfolio structure. Each asset class operates on its own investment cycle, and by combining multiple asset classes with different return patterns and correlation characteristics, investors can achieve superior diversification. This comprehensive approach to portfolio construction ultimately supports a higher sustainable withdrawal rate while maintaining the same level of retirement security.

Bengen’s updated analysis examined investment returns across hundreds of historical retirement scenarios extending back to 1926. By including more asset classes and refining his analytical methodology, he developed a more nuanced understanding of how different portfolio compositions perform across varying market environments and economic cycles.

Key Assumptions Behind the 4.7% Rule

The 4.7% safe withdrawal rate is not a universal formula applicable to every retiree. Rather, it’s based on specific assumptions about retirement planning that must be understood and potentially adjusted based on individual circumstances:

The Role of Inflation in Retirement Planning

Bengen emphasizes that inflation represents “the greatest enemy of retirees.” Historical analysis clearly demonstrates this point. During the 1970s, inflation averaged 8% to 9% annually for an entire decade, creating devastating effects on retiree portfolios and purchasing power. During such high-inflation periods, retirees were forced to withdraw money from their investments at an accelerated pace just to maintain their standard of living. Many retirees exhausted their savings sooner than expected, while others were compelled to significantly reduce their spending to preserve capital.

This harsh historical experience profoundly shaped Bengen’s current 4.7% figure. He specifically designed this withdrawal rate as a cautious starting point that would have sustained retirees even through the severe inflation episodes experienced in the 1970s. In this sense, the 4.7% rule reflects a worst-case scenario rather than a typical expected outcome.

Is 4.7% Really the Safest Rate?

Interestingly, Bengen himself suggests that 4.7% may actually be more conservative than necessary for many retirees today. He told Yahoo Finance that for current retirees, he might recommend something closer to 5.25% to 5.5%, depending on specific circumstances and market conditions.

The difference reflects changing economic circumstances. Today’s retirees face some headwinds, such as elevated stock market valuations, which research suggests may suppress future returns and thus warrant more conservative withdrawal rates. However, current retirees also benefit from more moderate inflation compared to the double-digit inflation of the 1970s and early 1980s. This improved inflation environment makes higher withdrawal rates feasible without imposing excessive risk.

Alternative Perspectives on Withdrawal Rates

While Bengen’s research provides a valuable benchmark, other respected financial research organizations offer differing recommendations. Morningstar’s latest State of Retirement Income report takes a more forward-looking approach, analyzing projections for future market returns, inflation, and interest rates. Based on these forward-looking models, Morningstar recommends a more conservative 3.7% withdrawal rate as the optimal rate for a 30-year retirement.

However, Morningstar’s research also acknowledges that retirees may safely withdraw above 4% in various circumstances. For example, retirees who own Treasury Inflation-Protected Securities (TIPS) or other inflation-protected bonds can support higher withdrawal rates, as these securities hedge against inflation risk. Similarly, retirees who expect to follow traditional spending patterns—which research shows tends to decrease with age—could begin with higher withdrawal rates and still maintain portfolio longevity.

Personalizing Your Retirement Withdrawal Strategy

Both Bengen and critics of his rule agree on one fundamental point: no single withdrawal rate works optimally for every retiree. Market volatility, unexpected healthcare costs, longevity uncertainty, and individual spending preferences all significantly influence the appropriate withdrawal rate for specific situations.

Bengen explicitly cautions that no rule can guarantee your money will last throughout retirement. The 4.7% figure represents a historically-tested starting point based on past market performance, but it cannot account for unprecedented future circumstances or individual variations in life expectancy, spending patterns, or portfolio composition.

Bengen emphasizes the critical importance of personalization: “Everyone is different. Personalize it for your situation.” This guidance suggests that retirees should work with qualified financial advisors to analyze their specific circumstances, risk tolerance, health expectations, and spending goals rather than mechanically applying any universal withdrawal rate formula.

Key Considerations for Your Retirement Planning

When evaluating whether the 4% rule, the 4.7% rule, or another withdrawal rate applies to your situation, consider these important factors:

Frequently Asked Questions

Q: How much more income would I receive using the 4.7% rule instead of the 4% rule?

A: For every $1 million in retirement savings, the 4.7% rule provides $47,000 annually compared to $40,000 with the 4% rule—a difference of $7,000 per year. Over a 30-year retirement, this translates to approximately $210,000 in additional spending power before accounting for inflation adjustments.

Q: Is the 4.7% rule guaranteed to work for my retirement?

A: No. The 4.7% rule is based on historical analysis and represents a statistically sound starting point, but it cannot guarantee success in all future scenarios. Your actual results will depend on market performance, inflation, healthcare costs, and your individual circumstances.

Q: Does the 4.7% rule account for taxes?

A: The rule focuses on portfolio withdrawal amounts, not after-tax income. You’ll need to account for income taxes separately, which will reduce your actual available spending depending on your tax situation and the types of accounts from which you withdraw.

Q: What if I expect to live longer than 30 years?

A: If you or your spouse expect to live beyond 30 years, you should consider using a lower withdrawal rate. Bengen notes that his analysis can be adapted for different retirement horizons—a longer expected lifespan typically warrants more conservative withdrawals.

Q: Can I use the 4.7% rule if my portfolio doesn’t match the recommended allocation?

A: The 4.7% rule is calibrated for a specific diversified portfolio (55% stocks, 40% bonds, 5% cash). Significantly different allocations may require adjustment of the withdrawal rate. Portfolios with higher stock allocations might support higher rates, while more conservative allocations might require lower rates.

Conclusion: A More Optimistic Retirement Outlook

William Bengen’s update from the 4% rule to the 4.7% rule represents welcome news for retirees seeking greater financial confidence and improved quality of life. The increase reflects more sophisticated research methodology, expanded asset diversification, and more than a century of historical market data. For a retiree with $1 million in savings, this seemingly small 0.7 percentage point increase translates to $7,000 in additional annual spending—a meaningful difference in retirement lifestyle and peace of mind.

However, it’s crucial to remember that withdrawal rates are not one-size-fits-all solutions. Bengen himself emphasizes that retirees should personalize their strategies based on individual circumstances, life expectancy, portfolio composition, and spending goals. Consider consulting with a qualified financial advisor to determine the appropriate withdrawal rate for your specific situation.

The 4.7% rule provides a useful starting point for retirement planning conversations and offers a research-backed benchmark that has proven valuable for millions of retirees. Whether you use 4%, 4.7%, or another rate, the fundamental principle remains constant: withdraw systematically, adjust for inflation, maintain portfolio diversification, and monitor your progress throughout retirement.

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medha deb

 

Medha Deb is an editor with a master's degree in Applied Linguistics from the University of Hyderabad. She believes that her qualification has helped her develop a deep understanding of language and its application in various contexts.

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