Scenic beach in Maldonado, Uruguay — a top retirement destination in Latin America known for its peaceful lifestyle and low cost of living. — **José Ignacio, Departamento de Maldonado, Uruguay**. Uruguay ranked 2nd in our top 5 retirement destinations in Latin America. Photo by Pedro Slinger on Pexels.

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Understanding Bill Bengen’s 4.7% Rule

What Is the 4% Rule and Why It Matters

The 4% rule for retirement—also known as the 4% rule—is a popular planning guideline that helps determine how much you can safely withdraw from your investment portfolio each year without running out of money. Think about it: if you withdraw too much money on an annual basis, you risk running out of money in the later years of your retirement. In contrast, if your annual spend is too small you aren’t not only not enjoying the fruits of your labor, but also could likely have retired much earlier. The 4% rule (of thumb) is commonly seen as a balanced middle ground between these two extremes.

Recently, Bill Bengen—the creator of the rule—has updated his recommendation. In his updated analysis, which includes a more sophisticated and diversified portfolio, he now advocates for using a less conservative 4.7% withdrawal rate. If one were to follow his recommendation, this would mean aiming for a smaller retirement nest egg that would allow you to retire sooner—sounds great, right?

In today’s post, we answer what is the 4% rule in retirement, explore Bengen’s updated 4.7% rule, and discuss how it differs from the original version, including the pros and cons of adopting this new guidance. We’ll also look at whether it could make sense for your specific retirement or FIRE (Financial Independence, Retire Early) plans.

How the 4% Rule Helps You Calculate Your Retirement Number

We have a dedicated post covering in detail the 4% rule of thumb. The 4% rule is a powerful financial independence strategy useful during both wealth accumulation and retirement. At the beginning of your investing journey, it can act as a guide to determine how much money you need to accumulate in order to achieve financial independence and step away from your career. According to the rule, it amounts to 25 times your annual expenses. If you envision needing $60,000 in retirement, then you would aim to accumulate a $1.5M portfolio ($60,000 x 25 or $60,000/0.04).

Following this example, during the first year of retirement, you would withdraw 4% of the portfolio, i.e. $60,000, and adjust in subsequent years for inflation to maintain the same level of purchasing power. It represents a “set and forget” strategy—once you retire, you withdraw a fixed amount on an annual basis, irrespective of market fluctuations, portfolio growth, or longevity considerations.

There is substantial nuance related to this rule. I recommend revising our coverage of its advantages and disadvantages in our previous post. However, for the purposes of today’s post, it is important to remember that the data underpinning this rule considered only 2 asset classes—both large cap US stocks and intermediate-term bonds. That simplicity helped it catch on, but it also left room for improvement.

Retirement planning desk setup with stock market charts, a financial calculator, and investment documents — illustrating the original 4% rule and portfolio strategy analysis. — How much does it take to retire? Using the 4%/4.7% rules. Photo by Jakub Żerdzicki on Unsplash.

Bill Bengen’s Updated Research and Portfolio Strategy

What is the Bengen 4.7% rule? In a more recent analysis, Bengen revised his original 4% rule upward to 4.7%. This new figure is based on a significantly more diversified portfolio, which includes additional stock categories. By expanding the number of asset classes, Bengen’s updated model improves portfolio resilience and offers a higher sustainable withdrawal rate—even when tested against very adverse conditions in the past.

The updated portfolio he used for backtesting was the following:

55% stocks, evenly divided among five categories—large-cap, mid-cap, small-cap, micro-cap, and international equities. In other words, 11% was allocated to each of these stock categories.
40% intermediate-term U.S. government bonds.
5% cash.

This greater diversification enhances retirement portfolio stability and reduces the risk of running out of money. It does so by tapping into different market segments that don’t move in perfect sync. The goal of a diversified portfolio is to include asset classes that are as uncorrelated as possible.

Bengen himself has repeatedly stressed that this new 4.7% represents a worst-case scenario across all tested historical periods. Out of 400 historical scenarios tested—each representing a different 30-year retirement period and a different stock/bond portfolio mix—only one of them required a 4.7% withdrawal rate to avoid portfolio depletions.

So, does the 4.7% rule for retirees actually work? Bengen’s historical analysis suggests that it held up even in the worst-case scenarios, with the average sustainable withdrawal rate closer to 7%

What does all this mean in practical terms for your retirement portfolio target and the number of years it will take you to get to retirement?

Retirement Planning and FIRE: How the 4.7% Rule Changes the Math

Here’s a simple example to show how the 4.7% rule affects your retirement savings target. Following the example above, let’s say you want to spend $60,000 annually in retirement (and adjust annually for inflation). As calculated earlier, following the 4% rule you would need a $1.5M portfolio. However, using the updated 4.7% rule this number drops to $1.28M. Increasing the withdrawal rate is one of the three main levers you can optimize in order to accelerate your timeline to retirement.

This means saving over $200,000 less to reach your retirement savings goal. Data suggests the majority of workers are not passionate about their job and career and would likely quit in a heartbeat if they could.

If that sounds like you, using the 4.7% rule could help you retire years earlier. How much sooner depends on your current investments, household income, and savings rate. You can play around with our Financial Independence Calculator to figure out exactly by how much it could shorten your working career (see screenshot in Figure 1 below).

Screenshot of interactive Financial Independence Calculator showing how different withdrawal rates like 4% and 4.7% impact retirement timelines. — **Figure 1**: Screenshot of free Financial Independence Calculator.

As mentioned, the values presented until now refer to traditional 30-year retirement timelines, not for very early retirees in the FIRE community, who can face—in extreme cases—retirement timelines of up to 60-70 years. Thankfully, Bengen also provides some analysis for these longer term periods. Specifically, Bengen’s analysis supports a conservative withdrawal rate floor of 4.1% when using his diversified portfolio.

This new analysis offers encouraging news for early retirement planners. Previously, many FIRE enthusiasts questioned the reliability of using the 4% rule and advocated for much more conservative withdrawal rates of even 3%. In the example above, this would mean needing to accumulate a $2M portfolio, $500,000 more than by using the 4% rule. For most, saving an additional $500,000 translates naturally into a much longer career.

It’s important to note that the 4.1% withdrawal rate reflects the worst-case scenario. If you have good understanding of your spending and are willing to have some built-in flexibility in your budget, this 4.1% is likely to be very conservative.

In terms of asset allocation, Bengen recommends maintaining 100% stocks during the accumulation phase to maximize portfolio growth (only if it is appropriate to your risk tolerance!). Five years before retirement, Bengen recommends shifting gradually towards a balanced portfolio that you will maintain in retirement, such as a 60/40 or 55/45 stocks-to-bonds allocation.

The reason for not changing your allocation at retirement (instead of 5 years earlier) is that, if you are unlucky, a stock market downturn could severely push back your retirement timeline. The more fixated you are with reaching retirement at a specific date, the more important it becomes to start this transition a few years before retirement.

Benefits of Following the Updated 4.7% Rule

Like the 4% rule, the biggest strength of the 4.7% rule is its simplicity. It provides a simple benchmark for setting your financial independence goals. The updated rule is grounded in a more sophisticated understanding of portfolio diversification, and likely mirrors more closely an internationally diversified portfolio.

The 4.7% rule is also based on worst-case scenarios tested in historical data. Despite being higher than the original rule, it remains very conservative for a retiree facing a traditional 30-year retirement timeline. For someone just starting to plan their retirement, using this updated figure is encouraging, since it can help them shave off some years from their financial independence timeline.

Limitations, Critiques, and Drawbacks of the 4.7% rule

A key limitation is that the 4.7% rule is based on a 30-year retirement horizon. If you plan for a longer timeline, say, of 40, 50, or more years, and you insist on using a fixed withdrawal strategy—one that withdraws a constant amount each year irrespective of market conditions—you will want to reduce the rate closer to 4.1%, even with this diversified portfolio. My recommendation here would be to at least look into dynamic withdrawal strategies (e.g., Guardrail Withdrawal Strategy or Variable Percentage Withdrawal), which will allow you to use higher withdrawal rates in exchange for some flexibility.

Another key concern for me is the issue with overfitting in Bengen’s model. As with any model rooted in backtesting, optimizing too strongly for portfolio mixes using past data can give us the illusion of safety without guaranteeing future success. Market conditions are always evolving, and future scenarios may differ significantly from historical data used in Bengen’s tests. It’s important to keep this in mind and that the optimally diversified portfolio over the next 30 years may differ substantially from Bengen’s.

Fixed withdrawal strategies ignore sequence of return risk (SORR) and lack dynamic adjustments for market volatility. SORR is particularly important for early retirees facing a longer than 30-year retirement timeline. We covered in a previous post how to protect yourself from SORR by using a bond tent approach and have also covered two popular dynamic withdrawal strategies that can overcome most of the drawbacks of using the 4%/4.7% rule, e.g., withdrawals using guardrails or Variable Percentage Withdrawal (VPW).

Sunny aerial view of Alicante, Spain — a relaxing European retirement location ideal for early retirees pursuing financial independence and lifestyle abroad. — Alicante, Spain. Spain ranked 2nd in our top 5 retirement destinations in Europe. Photo by Dean Milenkovic on Unsplash.

My Retirement Withdrawal Strategy and Lessons Learned

In spite of the limitations disclosed above, I personally find very encouraging that, through the backtesting of a diversified portfolio, the very worst case scenario was a 4.7% withdrawal. If you want to play it very safe, though, one approach could be to use this 4.7-5% as a means to calculate your Financial Independence number, but then rely on one of the dynamic withdrawal approaches linked above (guardrails, VPW, or similar).

My favourite approach (so far) is to use a 5% withdrawal rate, combined with guardrails, and a bond tent at retirement. I like the clarity of a fixed number to determine your financial independence number and timeline, but prefer to stay flexible when it comes to implementation—always making small adjustments on spending as the stock market and economic conditions evolve. Flexibility in spending allows you to enjoy higher income during retirement while managing risk. People like to geek out about whether a 3.25%, 3.5% or 4% fixed safe withdrawal rate is optimal, but, really, your ability to be flexible in spending is likely far more important.

I also plan to use tools like the “bond tent” approach to mitigate sequence of return risk (SORR). I plan to gradually increase bond exposure at retirement and during the first 3-5 years thereafter to protect my portfolio in the long term.

Before jumping on board with this approach, though, please note that this responds to my very particular circumstances and risk tolerance. Also, I am aware that there are tons of withdrawal strategies out there, and, while we are trying to cover as many as possible in this blog, there are still more to uncover.

Final Thoughts: Flexibility and Smart Planning Win

Bengen’s updated 4.7% rule certainly represents a meaningful evolution in retirement planning. It reflects how a more diversified portfolio would have performed in the past, and, while not perfect, gives us a guideline for what to expect moving forward.

If you take one thing away from today’s post, though, let it be the importance of flexibility. Combining diversified portfolios with dynamic withdrawal strategies is a powerful recipe for retirement success. It’s important to understand the assumptions behind safe withdrawal rate calculations, and tailor them to your own risk tolerance, spending flexibility, and retirement goals.