Bill Bengen advises retirees on a 65% stock, 30% bond, and 5% cash portfolio strategy.

Within stocks, he says to invest across large caps, mid caps, small caps, micro caps, and international.

Rebalance portfolios regularly to avoid risk and fund expenses, Bengen says.

The 4% rule for retirees is easy enough to understand in theory: withdraw that much of your portfolio per year, and your money should last you through retirement.

(Well, now it's more like the 4.7% rule, but you can read more about that here).

But what does that look like in practice? Bill Bengen, the rule's creator, recently shared with Business Insider what the optimal investment portfolio looks like and how investors should go about withdrawing their money.

First, let's get into the portfolio structure. Bengen, a former financial advisor and the author of "A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More," said that younger investors more than five years from retirement should allocate 100% of their portfolios to stocks.

That's because stocks have historically offered higher returns than other assets, and younger investors can stomach the higher risk.

But once an investor nears retirement, they should gradually reduce their stock allocation, eventually settling at 65%. Another 30% should be in fixed income, specifically intermediate-term bonds (which should include an allocation to Treasury inflation-protected securities, or TIPS), he said. And another 5% should be in cash.

Within the allocation to stocks, he shared five areas of the market to have equal exposure to.

Here's exactly how his optimal portfolio shapes up:

Exchange-traded funds are one easy way to gain exposure to these pockets of the market.

Examples of those that represent these trades include the SPDR S&P 500 ETF Trust (SPY), the iShares Core S&P Mid-Cap ETF (IJH), the VB (Vanguard Small-Cap ETF), the First Trust Dow Jones Select MicroCap Index Fund (FDM), the VXUS (Vanguard Total International Stock ETF), the Vanguard Intermediate-Term Bond ETF (BIV), and the State Street SPDR Bloomberg 1-10 Year TIPS ETF (TIPX).

You might also consider keeping a chunk of your cash allocation in a money market account to keep earning on it before spending.

Bengen said this portfolio construction works equally well for both younger and older retirees. Safe spending levels, however, differ by how long you intend a portfolio to last. For a timeline of 30 to 35 years, 4.7% is a safe withdrawal rate. For 60 to 70 years, 4.1% is appropriate, he said.

Some experts like to recommend an even higher allocation to stocks in retirement, Bengen said. But his optimal portfolio tends to resemble more closely the classic 60/40 model, as it can provide more security if equity markets crash.

"If you get a really bad bear market like in 2008 or 1929, your portfolio can be devastated," Bengen said.

Unfortunately, you can't just set and forget your investment portfolio. Some investments will outperform others, and you'll need to rebalance.

Doing so is crucial, Bengen said, so as not to take on unnecessary concentration risk that makes your portfolio particularly vulnerable to a pullback in one area of the market. It will also be part of how you fund your living expenses.

For example, small caps and international stocks have outperformed recently. So, if they've grown to more than their 13% allotments, you should sell part of those positions to bring them back down to the appropriate levels.

The proceeds of those sales can then be put to work across other areas of your portfolio. Some of them will go into your cash position, which you'll use to fund your spending.

"At the end of the year you'll be selling off investments that have done well and placing money into cash, and so it should work kind of automatically just through rebalancing," Bengen said.

Another way to raise cash will be through stock dividends and income from your bond positions, he said.

"Have all the income dividends from your various investments paid into that fund, so it's constantly replenished, so you don't run out of money there," Bengen said.

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