Bill Bengen, the long-time investment advisor who commanded national attention when he developed the 4% withdrawal rule for retirees back in 1994, has increased the withdrawal rate he uses on his own retirement portfolio to 4.7%, largely because of the upside he’s gained by adding small and microcap asset classes to his portfolio, he told the Bogleheads Live podcast this week.

The increase in the sustainable withdrawal rate is fairly dramatic since Bengen published his seminal paper in 1994, stating that retirees should plan to withdraw 4% of their assets every year during a 30-year retirement if they wanted their portfolio to last.

“My rule has been updated to 4.7%, so it’s no longer the 4% rule, and that comes from my research and adding a number of asset classes which have increased returns,” Bengen said.

U.S. microcap and U.S. small cap stocks in particular changed what he considers an ideal asset allocation. “When I added U.S. microcaps in my last round of research it did increase volatility, but significantly increased the withdrawal rate. That’s what helped bump it up to 4.7%,” Bengen said.

“But perhaps investors might consider taking 4.5% at this time when retiring until the smoke clears and we get a sense of where inflation is going. Inflation is the big wild card in this environment,” he added.

Bengen said he created his 4% rule based on an imaginary investor who retired in October of 1968 and ran into a terrible perfect storm” of bad stock market returns and very bad inflation.

“Are we in a similar period beginning this year with very high inflation and potentially low stock market returns, or entering something even worse? I don’t know, unfortunately, and we won’t know for quite a few years. But I think it’s serious enough that investors should perhaps be a little bit more conservative and perhaps plan as if this is a new situation and maybe take a little bit less than what the rule suggests,” he warned.

“Is the 50% to 70% stock allocation still required for the 4% rule to work?” Jon Luskin, a fee-only advisor and host of the podcast asked.

Bengen said his original research used a stock allocation of 50% to 75% to create the 4% rule.

Now, according to the retired advisor, the optimum stock allocation that allows the highest withdrawal rate over the long term is between 55% and 60% over the long term. If you have much less than that in equities your portfolio will not generate enough return to give you a good withdrawal rate. If you have much higher than that the volatility of the portfolio will also reduce your withdrawal rate, he said.

“Right now, I use seven asset classes, including five in stocks, cash and Treasury bonds. I think it tracks closer to what a sophisticated investor would use and I don’t think by adding additional asset classes I ‘ll be able to increase the withdrawal rate a heck of a lot more,” he said.

As for rebalancing, Bengen said he uses a third-party service that recommends changes to his asset allocation based on perceived changes in the marketplace.

“And I follow those recommendations. So right now, my stock allocation is really low. I expect at some point I will hear from the service that ‘Hey it’s time to get back in like it did in March of 2009, the party is back on. Let’s get heavier in stocks.’”

“I think it’s important to be an active investor, particularly today because the involvement of central banks in the markets has created bubble after bubble,” Bengen said.

They’ve also created bear markets that are much longer than we’ve seen in the past. “The bear market in 2000 saw about a 50% decline in stock prices, with almost a 60% decline in 2008 and who knows what we’ll have this time around. Not a clue.

“I recommend being an active investor because we know a stock market decline is one of the most damaging things to your withdrawal rate. If you can prevent your portfolio from shrinking in a bear market, you’ve done yourself a favor,” Bengen said.

He also noted that his research has shown that rebalancing on a fixed schedule or too often can hurt a portfolio, while letting rebalancing periods run longer—even every three, four or five years—“can actually significantly add to your withdrawal rate, as much as a quarter of one percent.

“The reason for that is that bull markets are longer and average about five to six years, so if you rebalance too soon, like annually, and you do it during a bull market, you’re cutting off the returns your stocks would have earned and reducing your withdrawal rate,” he said.

Bengen also said that while investors and some advisors have adapted the notion of taking higher withdrawals in the first 10 years of retirement while investors are more active, his research shows the higher rate can severely decrease sustainable withdrawal rates over the 20 years that follow.

“Let’s say you start out with 5.5% for the first 10 years, you might end up with 3.5% for the last 20 years of retirement. And you’ll have to decide if that would really work for you or not,” Bengen said.

“It’s certainly a cruel twist of fate and math that says ‘Hey you’re young you want to spend your money and do all these things but that’s when it’s the most risky to spend most of your money,’” Luskin said.

“Yeah, it is because you’re effectively creating your own bear market,” Bengen warned.