Withdrawal Rates Based on CAPE

keegs said:
I think this is news to me.....basing withdrawl rates on CAPE (PE/10). Make sense to me ..I think...What broad index are they using I wonder?

Anyway...what say you?


Maybe Past Performance Does Predict Your Savings' Future - Bloomberg
Click to expand...

I have done some of my own study on Schiller's data and the CAPE index and frankly I find it less than the author's "remarkably predictive." In fact it is pretty much just the opposite.


But then what do I know, I'm one of those that are 100% in equities in retirement and happy to be there.

fd
 
Certainly the CAPE in your calculation would have to be in sync with that portion of your AA that's in equities...(as an example, right now the CAPE for the financial sector is much lower than say the S&P 500) And if you weren't using some kind of bucket system along with it, your income would change with market performance, which might be a problem. But I think it's worth considering as a means to limiting the impact that market fluctuations have on your portfolio as you draw down.
 
Last edited:
So where is PE/10 listed where I can look it up regularly, not just on Prof Shilling's chart?
 
The problem with the concept of "over valued / under valued" based on P/E ratios is that it appears to be a very long wave, so we have very few "distinct" data points.

The wave is long enough that other stuff changes. Is a "high" P/E in 1960 the same as a "high" P/E in 2010?

I was frustrated in the 1980's and early 1990's that my employer's subsidized DC plan didn't have an equity option. They finally added one in 1995. By then, the P/E10 was about 25 - way high by historic experience. I decided on a very low equity allocation. We all know what happened in the next 5 years.

Suppose I had been trying to decide whether to retire at that point with a big stock allocation. I would have been very conservative, figuring we were at the peak of a bubble.
 

Attachments

  • CAPE.jpg
    CAPE.jpg
    151.1 KB · Views: 7
keegs said:
Certainly the CAPE in your calculation would have to be in sync with that portion of your AA that's in equities...(as an example, right now the CAPE for the financial sector is much lower than say the S&P 500) And if you weren't using some kind of bucket system along with it, your income would change with market performance, which might be a problem. But I think it's worth considering as a means to limiting the impact that market fluctuations have on your portfolio as you draw down.
Click to expand...

This is one of the craziest withdrawal strategies I have ever heard of (Maybe I don't get out much.)

This sounds to me like driving your car down the road by looking in the rear view mirror and then averaging the last 10 stops lights in that mirror to decide when it is time to stop at the next intersection. You are liable to get hit by a bus doing that!

Even besides the above obvious shortcoming is the fact that the author suggests using rates between 4.5% to 5.5% as the withdrawal rates, when most studies over many years have indicated that 4%-4.5% is the more prudent rate. In fact there have been some actual studies that have shown that the 5% rate could have easily ran you out of money in as little as 17 years if you happened to have started at the wrong time.

fd
 
The question always seems to be "how much can I take out", rather than "how little can I take out". Hence, we get all these methods of maximizing withdrawal that eat into capital at a rate that you hope keeps your portfolio above zero given your rate of return and life span. I LBYM on a small percentage of my wages.......I expect to LBYM in retirement too spending less than the income my investments produce.
 
The article mentions that during the 2000 crash, the PE was 40. ICBW, but I doubt anyone was severely hurt by maintaining their X% SWR during that period rather than adjusting for it. IMHO
 
I ran this up the pole over at bogleheads and it didn't generate too much enthusiasm. It seems a bit counter intuitive to me to be drawing down a relatively larger portion of your equities investments during down markets.

Anyone care to fathom an argument for that?

I recently watched an interview with Robert Shiller where CAPE was a topic and my take away was that while it can be predictive it's not reliably actionable.

This correlation between starting retirement and your draw down and where we are in the business cycle remains an issue to my mind.
 
Keegs.
The real problem is you can't predict the future, so any method that either does not follow the conservative 4% rule, or something similar like the RMD withdrawal rate, that bases the withdrawal on your current balance and your age, has a large chance of running you out of money.

There is no logic in my book that would let you draw down more of your portfolio during a down year -- actually you should be doing just the opposite, if you have a withdrawal rate that is greater than 4% in the up years.

fd
 
keegs said:
I ran this up the pole over at bogleheads and it didn't generate too much enthusiasm. It seems a bit counter intuitive to me to be drawing down a relatively larger portion of your equities investments during down markets.

Anyone care to fathom an argument for that?
Click to expand...

it has to do with expected returns. I.e. 1M in equity at PE10 = 15 has much higher returns going forward than 1M in equity with PE10 = 25.

I think to get past the counter intuitive part, you have to realize that once you go into a down market your 1M @ PE10=25 now becomes something like 500k @ PE10=12.
 
photoguy said:
it has to do with expected returns. I.e. 1M in equity at PE10 = 15 has much higher returns going forward than 1M in equity with PE10 = 25.

I think to get past the counter intuitive part, you have to realize that once you go into a down market your 1M @ PE10=25 now becomes something like 500k @ PE10=12.
Click to expand...

Thanks PG...

I understand the potential for equities values to improve in a low PE env. but consuming a larger percentage of a depressed portfolio based on a market prediction seems too risky even with the PE calculated as a ten year average.
 
photoguy said:
it has to do with expected returns. I.e. 1M in equity at PE10 = 15 has much higher returns going forward than 1M in equity with PE10 = 25.

I think to get past the counter intuitive part, you have to realize that once you go into a down market your 1M @ PE10=25 now becomes something like 500k @ PE10=12.
Click to expand...

keegs said:
Thanks PG...

I understand the potential for equities values to improve in a low PE env. but consuming a larger percentage of a depressed portfolio based on a market prediction seems too risky even with the PE calculated as a ten year average.
Click to expand...
Photoguy is right. I don't think there is any implication that if you were already retired and withdrawing that you might not be wise to scale back your $25K per year plus inflation (initially set on that $1M portfolio at PE10 = 25). The theory simply says that if you retire a few years later with $500K at PE10 = 12 maybe you could safely start out a little bit higher than $12.5K
 
You must log in or register to reply here.

Similar threads

M
withdrawal rates on portfolio charts
Replies
12
Views
844
mathjak107
M
walkinwood
Risk-based retirement income guardrails
Replies
5
Views
639
Gumby
Gumby
ShokWaveRider
SPIA Annuity vs MYGA with systematic Withdrawals as part of one's Withdrawal Strategy
Replies
10
Views
602
aja8888
aja8888
N
Timing of Inherited IRA Withdrawals
Replies
20
Views
2K
pb4uski
pb4uski
2
Reducing stock exposure in Retirement, age 60+
4 5 6
Replies
144
Views
8K
Onda
O

Latest posts

Back
Top Bottom