What he concluded was that the overall market’s price-earnings ratio — taking the current price for the Standard & Poor’s 500-stock index divided by the average inflation-adjusted earnings for the past 10 years before the date of withdrawal — was predictive enough to produce guidelines. Then he came up with the following suggestions for a portfolio of 60 percent stocks and 40 percent bonds meant to last through 30 years of retirement.
If the ratio was above 20, indicating that stocks were overvalued, than a 4.5 percent withdrawal rate was prudent given that the stock market was likely to fall. But if it was between 12 and 20 (the historical median is roughly 15.5), a 5 percent rate was safe, tested against every historical period for which data was available. And if it was under 12 — a level it almost got to earlier this year — a rate of 5.5 percent would work.
The most recent figure was 17.67, which suggests a 5 percent withdrawal rate for current retirees. It had been above 20 until October 2008.
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