Retirees commonly live on a portfolio in one of two ways. One is a withdrawal rule, and the other is a portfolio of high-yield securities. This post compares them.
The safe withdrawal rate is one of the most discussed figures in retirement planning. It is the share of your savings you take out in the first year of retirement. The dollar amount is then raised for inflation every year after. In his 2025 book, A Richer Retirement, William Bengen, the planner behind the original 4% rule, updated this figure to 4.7%.
Bengen's first study used a portfolio that combined large U.S. stocks with intermediate-term Treasuries. His new study uses seven different asset classes. These include U.S. stocks of various sizes, from large-cap to micro-cap, as well as international stocks, intermediate-term government bonds and Treasury bills. With the portfolio diversified in this way, Bengen found that retirees can safely withdraw a larger amount each year.
On a $1 million portfolio, the new rule lets you withdraw $47,000 in the first year. The second-year withdrawal is around $48,400, assuming an inflation rate of 3%.
1. From the 4% rule to the 4.7% rule
Bengen's research suggests that 4.7% is the highest rate that would have worked throughout the toughest 30-year period on record. In most periods retirees could have withdrawn more, so 4.7% is a starting point. Bengen does not recommend following this rate exactly. He treats it as a guideline.
Morningstar is more conservative in its estimates. According to its latest research, a safe starting rate for a 30-year retirement with a 90% chance of not running out of money is 3.9%. This post uses Bengen's 4.7% as the benchmark, since it sets a higher standard for a yield portfolio to meet.
The rule has two benefits that a typical yield portfolio does not give you. First, the income you draw increases over time as prices go up. Second, what matters is the overall performance of your portfolio. The amount of cash it generates is only one part of that.
Playbook Move: Decide which kind of income you need before choosing securities. A withdrawal rule pays an amount that rises every year and draws down principal over time. A yield portfolio pays a larger amount that stays fixed and attempts to preserve principal. The two meet different needs.
2. What an 8% yield provides
The same $1 million invested in securities that yield 8% would pay $80,000 in the first year. That is $33,000, or 70%, more than the 4.7% rule allows, and twice what the original 4% rule allows. The larger first-year income is the main reason retirees are drawn to high-yield securities.
The 10-year Treasury yield ended Friday, October 23, 2026, near 5%. At that yield a retiree can earn about 5% a year without credit risk. That raises the bar for every preferred stock, BDC and covered-call fund. An 8% yield is roughly three percentage points higher than the 10-year Treasury. That extra amount is what you are paid to take on credit risk (the issuer may not pay), call risk (the issuer may redeem the security early) and market risk.
Four kinds of security come up in any 8% portfolio. A preferred stock is a share that pays a fixed dividend and ranks ahead of common stock. A baby bond is a bond that trades on a stock exchange, usually in $25 units. A business development company (BDC) is a listed company that lends to private businesses. A covered-call fund holds stocks, sells call options on them and pays out the option income.
A portfolio that includes only investment-grade preferreds and baby bonds probably yields less than 8%. To reach 8%, you often need to add riskier investments such as BDCs, covered-call funds and lower-rated issuers. These are the ones most exposed to the risks that can hurt your portfolio.
This type of income typically stays the same over time. A $25 preferred stock that pays 6% pays $1.50 every year as long as you hold it. Baby bonds work in a similar way and pay a fixed rate of interest until they mature. Neither keeps pace with inflation. The income they generate does not increase, even if the cost of living does.
At a 3% inflation rate, the withdrawal under the 4.7% rule reaches $80,000 by the 19th year. The yield portfolio pays more for the first 18 years, and less every year after that. By year 19, a fixed payment of $80,000 has the same purchasing power as about $47,000 today. That is the amount the 4.7% rule pays in the first year. The original 4% rule would have kept the yield portfolio ahead for 24 years. Bengen's revision shortened that period by six years.
A retiree who is 65 today will be 83 in 18 years, and many people live longer than that. The comparison also assumes that the $80,000 keeps coming in every year, and that is not a safe assumption.
Most bank preferreds do not accumulate dividends if they are skipped, so a missed dividend is permanently lost. BDC income rises and falls with short-term interest rates. As of October 2026 the Fed was raising rates. When it starts cutting again, dividends that seem secure today may shrink. Distributions from covered-call funds tend to increase when markets are volatile and decrease when they are calm.
Playbook Move: Base a retirement budget on the income a security can reasonably be expected to sustain. For a BDC, that is the base dividend, excluding any supplemental payments. For a covered-call fund, it is the average of the past 12 months of distributions. Assume no increases over time.
The two income streams, year by year
The table sets out the comparison above for a $1 million portfolio and 3% inflation. It assumes the 8% payment is never cut.
| Year | 4.7% rule withdrawal | 8% yield payment | What the $80,000 buys in today's dollars |
|---|---|---|---|
| 1 | $47,000 | $80,000 | $80,000 |
| 2 | $48,400 | $80,000 | $77,700 |
| 10 | $61,300 | $80,000 | $61,300 |
| 19 | $80,000 | $80,000 | $47,000 |
| 25 | $95,500 | $80,000 | $39,400 |
| 30 | $110,800 | $80,000 | $33,900 |
$1 million starting portfolio, 3% inflation, figures rounded to the nearest $100. The withdrawal rises 3% a year from $47,000. The last column divides $80,000 by the rise in prices since year 1.
Which one to use
The two approaches pay for different things, so start from the bills you need to cover.
- If you need the most income in the first years of retirement, the 8% portfolio pays $33,000 more in year 1 and stays ahead through year 18.
- If you need income that keeps up with prices into your eighties and nineties, the 4.7% rule does that, and the fixed payment does not.
- If you choose the yield portfolio, budget on the base dividend or the 12-month average distribution, and assume it never rises.
The comparison so far treats the 8% yield as the portfolio's return. It often is not, because a fund can pay out more than it earns. That, the case for combining the two approaches, and what changes if you retire in India are covered in Yield vs total return in high-yield funds. If you spend in rupees, the exchange rate matters as much as the yield, as the rupee's slide against the dollar shows. To see what your own savings would support, start with the net worth tracker.
From Edition 16 of the NRI Playbook newsletter. For informational purposes only; not financial, tax, or legal advice. For decisions about your specific situation, consult a qualified cross-border tax professional.