Bill Bengen, an independent financial planner, published a paper in the Journal of Financial Planning in 1994 that changed retirement planning forever. In this paper, Bengen tackled a question every worker eventually faces: “How much can I really spend without running out of money?”
By stress-testing portfolios against some of the worst economic storms in American history, including the Great Depression and the brutal stagflation of the 1970s, Bengen analyzed decades of historical market data. Simply known as The 4% Rule, his conclusion became a cornerstone of personal finance.
If you withdraw 4% of your nest egg in your first year of retirement and then adjust your withdrawals for inflation each year, your money will last at least 30 years. As a result of its simplicity, stability in historical data, and the psychological comfort it provided retirees terrified of outliving their money, the 4% rule became the gold standard for retirement planning. And, by simplifying the math, it turned an intimidating question into something easy to do.
Despite this, the world is constantly changing. Bengen recently published an updated version of his calculations in his book A Richer Retirement: Supercharging the 4% Rule. His updated conclusion? By sticking rigidly to 4%, you may be unnecessarily shortchanging yourself.
As of now, the “worst-case scenario” standard is 4.7%.
You might think a 0.7% bump isn’t much, but in retirement math, it’s a massive 17.5% increase. In this article, you’ll learn why the rule changed, the new 4.7% rule’s impact on your wallet, and how to implement it.
What Changed? The Evolution from 4% to 4.7%
If you want to understand why Bengen updated the rule, you have to know what the original 4% rule actually meant. It wasn’t meant to be an average or an optimal goal; it was a rough estimate.
As a result of Bengen’s research, the term SAFEMAX was coined — the historical maximum withdrawal rate that can withstand the worst-case scenario. According to his original 1994 study, the nightmare scenario concerned a retiree who retired in 1968. The 1968 retiree experienced a prolonged stock market crash and sky-high inflation in the 1970s. Within 30 years, their portfolio would have been worth zero if they had taken a penny more than 4.15% (rounded down to 4% for safety).
Over the years, though, Bengen’s models have been refined. After incorporating small-cap stocks into his asset data in 2006, he bumped up the rule to 4.5%.
As a smart investor, Bengen diversified his sandbox with his latest update. Rather than focusing only on large-cap stocks and government bonds, he expanded his modeling to include seven distinct asset classes, including mid-cap stocks, micro-cap stocks, international equities, and Treasury bills.
With the diversification of the historical portfolio, the overall returns became more resilient against specific economic shocks. Even the unluckiest retirees in American history could have survived a 30-year retirement with a starting withdrawal rate of 4.7% after rerunning his simulations across roughly 400 historical retirement timelines.
The Massive Financial Impact of 4.7%
What does a 17.5% bump in withdrawal rate mean in practice? Imagine you’ve got a solid nest egg of $1.5 million for retirement.
- Using the old 4% rule, your first-year retirement budget would be $60,000.
- The new 4.7% rule bumps your first-year retirement budget to $70,500.
In other words, that’s nearly $900 per month, or $10,500 per year. For many, this is the difference between barely scraping by on basic expenses and funding multigenerational family vacations, covering rising healthcare costs, or spoiling grandchildren without feeling guilty.
Additionally, if you are part of the FIRE community or simply want to stop working sooner, the 4.7% rule dramatically lowers your “retirement number.”
For a $60,000 annual income, you would need a portfolio worth $1.5 million plus 25x your expenses, or a “multiplier” of 25. As a result of the 4.7% rule, your multiplier drops to roughly 21.3x your expenses. For the same $60,000 income, you would need only $1,276,595. In just three to five years, that change could put you three to five years ahead in your career.
Step-by-Step: How to Implement the 4.7% Rule
In contrast with the old, “set it and forget it” 4% rule, implementing 4.7% requires a bit more intent. If you want to achieve Bengen’s safety promises, you need to follow his underlying blueprint:
Step 1: Build the “Bengen Seven” diversified portfolio.
When your money is parked in a low-yield savings account or an S&P 500 index fund, the 4.7% rule doesn’t work. The Bengen model generates this higher withdrawal rate by assuming a balanced portfolio, typically around 55% equities, 40% bonds, and 5% cash, spread across seven asset classes:
- U.S. Large-Cap Stocks
- U.S. Mid-Cap Stocks
- U.S. Small-Cap Stocks
- U.S. Micro-Cap Stocks
- International Stocks
- Intermediate-Term Government Bonds
- Treasury Bills (Cash equivalents)
Step 2: Establish your base year baseline.
As soon as you decide to retire, calculate the liquidated value of your retirement portfolio. Then, take that total and multiply it by 0.047.
For example, if your portfolio is worth $1,000,000 on retirement day, your year-one distribution budget is $47,000. To fund your living expenses, divide this amount up into monthly or quarterly chunks.
Step 3: Apply the annual inflation adjustment.
For the next two years, you ignore your remaining portfolio balance completely when calculating your baseline withdrawal. Instead, you adjust your previous year’s dollar amount based on the Consumer Price Index (CPI) or overall inflation.
With a first-year withdrawal of $47,000 and inflation of 3% over those twelve months, your second-year withdrawal will be:
$47,000 x 1.03 = $48,410
By continuing to do this calculation every year, you ensure that your actual purchasing power remains unchanged, regardless of whether the economy is experiencing inflation or deflation.
Step 4: Adopt a “dynamic” guardrail strategy.
Despite Bengen’s 4.7% rule being mathematically sound, he strongly opposes blind, mechanical execution. After all, the real world requires flexibility. To ensure total safety, dynamic guardrails should be installed.
- The valuation modifier. According to Bengen, if you retire during a period of low-to-moderate inflation and low market valuations, you could actually withdraw as much as 5.25% or 5.5%. In contrast, if you retire during a time of high inflation, you should be conservative.
- The market freeze. If the stock market suffers a brutal bear market, consider freezing your inflation adjustment. When asset prices are depressed, keeping your distribution flat for one cycle reduces “Sequence of Returns Risk.”
Final Thoughts: Don’t Die with a Mountain of Regret
In my opinion, Bill Bengen’s 4.7% rule is most compelling from a psychological perspective. An excessively conservative retirement withdrawal rate can lead retirees to spend their best years in fear, counting pennies unnecessarily.
In most historical cycles, retirees who follow a strict 4% rule die with a massive pile of unspent cash, often leaving behind a larger fortune than they began with. Although leaving a legacy for heirs or a charity is noble, dying with millions of dollars because of the fear of taking an extra vacation or buying a safer vehicle is an indictment of miscalculation.
There’s no better bridge than the 4.7% rule. While respecting the harsh mathematical realities of market volatility, it frees you to enjoy the wealth you have built over decades. However, always consult your financial adviser, review your asset allocation, and consider whether it’s time to boost your retirement income.
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