An 8% Yield or the 4.7% Rule.

Edition 16 · Two ways to draw income from savings, and what each one costs

Manish Hemrajani
October 25, 2026

Announcing YieldDesk

YieldDesk, a research platform for income investors, opens to the public on Sunday, November 1. It covers U.S. preferred stocks, baby bonds, preferred ETFs, BDCs, and covered-call ETFs, with an Income Quality Score and the filings behind each security. It does not provide investment advice or recommend any security. You can download a free 43-page primer, YieldDesk 101: A Primer on Income Investing.

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This edition compares 2 common ways to live on a portfolio in retirement. If a relative has recently bought a fund because it pays 12% a year, please forward it to them.

The Rundown

Treasury yields. The 10-year Treasury yield ended Friday near 5%. A retiree can now earn about 5% a year without credit risk, which raises the bar for every preferred stock, BDC and covered-call fund. The Federal Reserve meets on Tuesday and Wednesday. The federal funds rate is 3.75% to 4.00% after the September increase.

The rupee. The rupee closed Friday at 94.93 to the dollar, 5.2% weaker than at the start of the year. The NIFTY 50 is down 13.5% this year in rupees and 17.9% in dollars. The difference between the two figures is the cost of the weaker currency to a dollar-based investor.

Visa Bulletin. The November bulletin moves the EB-3 India Final Action Date forward 21 days, to January 22, 2014. EB-2 India stays at November 1, 2013. USCIS will accept employment-based filings under the Dates for Filing chart this month.

YieldDesk. YieldDesk, a research platform for income investors, opens to the public on November 1. This edition draws on its new primer, YieldDesk 101. I own YieldDesk, and readers should weigh what follows with that in mind. YieldDesk does not issue ratings, price targets or investment advice.

Diwali. Muhurat trading takes place on Sunday, November 8, from 2:20 to 3:30 p.m. IST. It is the first time the session has been held in the afternoon. Indian markets are closed on Tuesday, November 10.

MAIN STORY

An 8% Yield or the 4.7% Rule

When it comes to planning for retirement, one key figure that's often discussed is the safe withdrawal rate. In his 2025 book, A Richer Retirement, Bengen updated this figure to 4.7%. To understand how he arrived at this number, let's take a look at his research. Initially, Bengen's study focused on a portfolio that combined large U.S. stocks with intermediate-term Treasuries. However, his new study takes a more nuanced approach, incorporating 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. By diversifying the portfolio in this way, Bengen found that retirees can safely withdraw a larger amount each year. To put this into perspective, imagine having a $1 million portfolio. Using the new rule, you could withdraw $47,000 in the first year, and around $48,400 in the second year, assuming an inflation rate of 3%. This updated guidance can be a valuable tool for anyone looking to create a sustainable retirement income strategy.

1. From the 4% rule to the 4.7% rule

When it comes to retirement planning, finding the right withdrawal rate is crucial. Bengen's research suggests that 4.7% is the highest rate that would have worked throughout the toughest 30-year period on record. This doesn't mean that retirees can't withdraw more in most cases, but it's a good starting point. In fact, Bengen doesn't recommend following this rate exactly - it's more of a guideline. Morningstar, on the other hand, is a bit more conservative in its estimates. According to their latest research, a safe starting rate for a 30-year retirement with a 90% chance of not running out of money is 3.9%. For our purposes, we'll use Bengen's 4.7% as the benchmark, since it sets a higher standard for a portfolio to meet. This way, we can ensure that our retirement plan is robust enough to withstand even the most challenging economic conditions.

The rule has two key benefits that you won't get from a typical yield portfolio. First, the income you earn will increase over time as prices go up. And second, what matters most is the overall performance of your portfolio, not just the amount of cash it generates. This means you're looking at the big picture, rather than just focusing on the cash returns.

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. They answer 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.

When you're looking at an 8% yield, it's roughly three percentage points higher than what you'd get from a 10-year Treasury. This extra amount is basically what you're getting paid to take on credit risk, call risk, and market risk. If you stick to a portfolio that only includes investment-grade preferreds and baby bonds, you're probably looking at yields that are less than 8%. To actually reach that 8% mark, you often need to mix in some riskier investments like BDCs, covered-call funds, and lower-rated issuers - these are the ones that are most exposed to the risks that can hurt your portfolio.

Typically, this type of income stays the same over time. For instance, if you have a $25 preferred stock that pays 6% interest, you can expect to get $1.50 every year as long as you hold onto it. Baby bonds work in a similar way, paying a fixed rate of interest until they mature. One thing to keep in mind is that neither of these options keeps pace with inflation - the income they generate doesn't increase, even if the cost of living does.

When you're dealing with a 3% inflation rate, the 4.7% rule has a withdrawal amount that hits $80,000 by the nineteenth year. What this means is that the yield portfolio pays out more for the first 18 years, but then it starts paying out less every year after that. To put it into perspective, by the time you reach year 19, a fixed payment of $80,000 has the same purchasing power as about $47,000 today - which is the same amount you'd get from the 4.7% rule in the first year. It's worth noting that the original 4% rule would have kept the yield portfolio ahead for 24 years. However, with Bengen's revision, that period was shortened by six years.

Let's think about a 65-year-old retiree - in eighteen years, they'll be 83, and many people live even longer than that. When we compare investments, we're assuming that the $80,000 will keep coming in every year, but is that really a safe bet? For example, most bank preferreds don't accumulate dividends if they're skipped, so if a dividend is missed, it's lost forever. Then there are Business Development Company (BDC) incomes, which go up and down with short-term interest rates - right now, the Fed is raising rates, but when they start cutting again, those dividends that seem secure today might actually shrink. And what about covered-call funds? Their distributions tend to increase when markets are all over the place, but decrease when things 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.

3. Yield and total return

The most common error with high-yield securities is to treat the yield as the return.

Let's take a closer look at how some investments perform. For example, a fund that pays out 12% but loses 8% of its value every year actually only returns 4%. Similarly, a BDC that pays 11% but sees its NAV per share drop 4% annually will only give you a return of around 7%. Then there's the case of a single-stock covered-call fund described in YieldDesk 101 - it paid out 40% over the course of a year, but its share price fell by 31%. When you factor everything in, its total return was only 9%, which is actually less than the return on the underlying stock.

Here's what happens when a fund pays out more money than it makes: the extra amount comes from the investor's own money. The 4.7% rule is similar, but it's a planned and controlled way of using the principal. On the other hand, a high-yield fund with a decreasing value does the same thing, but it's not always clear. The tax label on the payout might not show that it's actually using the principal. For example, a payout that's labeled as "income" might still be using the investor's own money, and a payout labeled as "return of capital" might not be a cause for concern.

The clearest check is to compare a fund's total return with its distribution rate over three to five years. If the total return is lower, part of each distribution was a return of the investor's own money.

Playbook Move: Before buying, review the fund's NAV per share over at least five years. If NAV has declined steadily while the fund paid a high distribution, treat part of that distribution as principal. Spend less than the full amount and reinvest the remainder.

4. Where each approach fits

Concentration deserves particular attention in preferred ETFs. A broad preferred index often holds 60% or more of its assets in financial companies. In 2008, and again in March 2023, most bank preferreds fell at the same time, including those issued by banks that were never in difficulty.

The two approaches can also be combined. Some retirees use income securities to cover fixed costs in the first 10 to 15 years of retirement, while a fixed payment still keeps pace with expenses. A separate growth portfolio, drawn down under a withdrawal rule, provides for rising costs in the later years.

Playbook Move: Count the banks and insurers among your income holdings. If they account for more than half, most of your income depends on a single industry. Use income securities for the years in which a fixed payment still covers your costs, and rely on a growth portfolio for the years after.

5. For NRIs: the country of retirement matters

If you're planning to retire in India, either fully or partially, there are a couple of things you should keep in mind.

Here's the thing about currency: it's been a big factor over the past five years. The dollar has gone up about 4.8% a year compared to the rupee. So, if you're getting a fixed amount of dollars and spending them in India, you're actually getting more rupees each year. This has helped offset the fact that retirees aren't getting an inflation adjustment, since their expenses are in rupees. But here's the catch: this benefit isn't guaranteed. The rupee hit a record low of 96.82 in May, and although it's recovered a bit since then, Indian prices are also rising. So, the overall gain is smaller than you might think, considering the currency movement alone.

Here's how it works the other way around for investments in rupees. Let's say you have a deposit in rupees that pays 7% interest per year. If you hold onto it for a year, and the value of the rupee drops by 5.2% - which is what's happened so far in 2026 - you'll actually only earn about 1.5% in terms of dollars. So, if you're planning to spend your money in dollars, it's a good idea to convert the interest you're earning on your rupee investments into dollars before comparing it to what you could earn from similar investments in the US. That way, you can get a better sense of which option is really the best deal.

Taxes are the next thing to consider. If you live in the US, the dividends from preferred stocks are a great way to get income without paying too much in taxes. But if you're from another country, things change. For example, if you're from India, you'll likely have 25% of your preferred dividends withheld for US taxes, unless you've filled out the right form. On the other hand, interest from some special kinds of bonds can be paid out without the US taking a cut, as long as you've got the right paperwork. Some investment funds can also pay out part of their dividends as "interest-related" payments, which can avoid US taxes too - but not all funds do this, and some brokers might still withhold the taxes anyway.

When someone retires and moves to India, they have to pay taxes on their income based on a sliding scale. But here's the good part - they can claim a credit for any taxes they've already paid in the US. There's also something called the RNOR period, which we talked about in edition 15. During this time, India doesn't tax a lot of the income that comes from outside the country.

Compliance Alert: When investing across borders, it's crucial to get the details just right. The way taxes are withheld from your investments depends on several factors, including the type of security, the fund's own rules, the broker's practices, and your residency status in both countries. To avoid costly mistakes, it's a good idea to double-check each of these points with a cross-border tax expert and a chartered accountant before creating an income portfolio. One wrong assumption can lead to errors that repeat with every payment, so it's worth taking the time to get it right.

Playbook Move: If you expect to retire in India, plan the income portfolio around the tax status you will hold after the move. The securities that are cheapest to own in tax terms today may be among the most expensive later.

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Disclaimer. NRI Playbook is for informational purposes only and does not constitute financial, tax, legal, or immigration advice. We are not registered investment advisors, tax preparers, or attorneys. Information reflects our editorial perspective at the time of writing. For decisions about your specific situation, consult a qualified cross-border tax professional, financial advisor, or immigration attorney. Past performance is not indicative of future results. Market data may be delayed or revised.