The Ultimate Guide to Safe Withdrawal Rates – Part 18: Flexibility and the Mechanics of CAPE-Based Rules

Welcome back to the newest installment of the Safe Withdrawal Rate Series. To go back and start from the beginning, please check out Part 1 of the series with links to all the other parts as well.

Today’s post is a follow-up on some of the items we discussed in the ChooseFI podcast a few weeks ago. How do we react to a drop in the portfolio value early on during our retirement? Recall, it’s easy not to worry too much about market volatility when you are still saving for retirement. As I pointed out in the Sequence of Return Risk posts (SWR series Part 14 and Part 15), savers can benefit from a market drop early during the accumulation phase if the market bounces back eventually. Thanks to the Dollar Cost Averaging effect, you buy the most shares when prices are down and then reap the gains during the next bull market. That has helped the ERN family portfolio tremendously in the accumulation phase in 2001 and 2008/9.

But retirees should be more nervous about a market downturn. Remember, when it comes to Sequence of Return Risk, there is a zero-sum game between the saver and the retiree! A market drop early on helps the saver and thus has to hurt the retiree. What should the retiree do, then? The standard advice to early retirees (or any retiree for that matter) is to “be flexible!” Great advice! But flexible how? We are all flexible around here. I have yet to meet a single person who claims to be completely inflexible! “Being flexible” without specifics is utterly useless advice. It’s a qualitative answer to an inherently quantitative problem. If the portfolio is down by, say, 30% since the start of our retirement, then what? Cut the withdrawal by 30%? Keep withdrawals the same? Or something in between?

How flexible do I have to be to limit the risk of running out of money?

That’s today’s post: Using dynamic withdrawal rate strategies, specifically CAPE-based withdrawal rules, to deal with the sequence of returns risk…

Fixed vs. Variable Withdrawal Rules

As we mentioned in the ChooseFI podcast and elsewhere: Nobody will ever set a fixed withdrawal amount and then just watch the portfolio dwindle away after years of poor returns. One way to prevent premature depletion is to set the withdrawals to one constant percentage of the portfolio every year (or month). The unpleasant side effect of this so-called Constant Percentage Rule: Withdrawals become just about as volatile as the portfolio. Let’s look at the hypothetical numerical example below (actual data will follow soon, be patient, everybody!). We start with a million dollar portfolio and an initial withdrawal of $40,000. We get returns of -30%,-10%,+20%,+20%, and +20% over the next 5 years, so the stock index actually recovers again (cumulative compound return of +9% after 5 years).

With a fixed withdrawal amount ($40k every year) we end up with only slightly more than $800,000. In contrast, withdrawing 4% of the portfolio value at the beginning of the year we are able to mitigate that sequence of return risk at least somewhat. We finish at $887k. But it’s at the cost of much lower withdrawals along the way. In fact, the withdrawals drop by slightly more than the market: -32.8% in the second year (from $40,000 to $26,880). That’s because the second year withdrawal is reduced by both the first year market drop and the previous year’s withdrawal. Bummer! And after a 10% market drop in year 2, the year 3 withdrawal falls by, you guessed it, slightly more than the market performance the previous year: -13.6%.

Numerical Example: Readjusting the withdrawals to 4% every year depletes the portfolio less but also means significant reductions in the withdrawals.

So, as we said in one of the Sequence of Return post (Part 15): dynamic withdrawals don’t really avoid sequence risk. True, you mitigate the impact of sequence risk on the final portfolio value, but it’s at the cost of lower withdrawals along the way. There is no free lunch and there’s no way to completely avoid sequence risk!

For how long do we have to be flexible?

So, we might endure a significant drop in withdrawals. Fine! Most people can deal with that, at least for a few years. Cut expenses, maybe get a side gig, move to a country with lower living expenses and/or defer some expenses such as replacing durable items. Surely, we can all be that flexible for a year or two, or maybe even five.

But can we be flexible for 28 years?

That’s how long it took to get back to the initial withdrawal amount for the January 1966 retirement cohort! See the chart below of the time series of withdrawals per $100 of initial capital for four different unfortunate retirement cohorts that were hit with an unhealthy dose of sequence of return risk:

  • The 1929 cohort that suffered through the Great Depression needed 26 years to recover the initial real purchasing power. With a 60% drop in between!
  • The 1966 cohort needed 28 years to recover from the perfect storm of lackluster returns in the late 60s, then four recessions (1970, 1973-75, 1980, 1982-82) with poor equity returns, especially in 1974 and 1982. For 11 years in a row, withdrawals were 40% or more below the initial!
  • The year 2000 cohort is still under water after 17 years despite the strong bull market over the past 8 years! That initial $40,000 withdrawal out of a million dollar portfolio dropped to about $20k at the bottom of the Global Financial Crisis and it’s now at just under $34,000!
  • The 2007 cohort actually recovered after “only” 7 years. So, there’s some good news! It appears that one single bear market is something we can handle with a constant percentage rule. Two bear markets in one decade? Not so much, that’s why the year 2000 cohort still hasn’t recovered!
Rolling 12-month withdrawals per $100 of initial capital under the 4% constant percentage rule (80% stocks, 20% bonds). This dynamic withdrawal rule avoids running out of money but could generate deep and extended multi-decade drawdowns in withdrawals! Notice that the 2000 retirement cohort still hasn’t recovered its initial withdrawal amount after over 17 years!

But don’t get me wrong! The 4% constant percentage rule did eventually return to its original portfolio value for the 1929, 1966 and 2007 cohorts (and thus the original withdrawal amount) and it will likely recover even for the year 2000 cohort, which is much better than the stubborn, fixed withdrawal amount (CPI-adjusted). Both the 1929 and 1966 cohorts would have depleted the portfolio within 30 years if they used the traditional 4% rule, i.e., 4% initial withdrawal followed by CPI-adjustments irrespective of portfolio performance.

Is there a “better” dynamic withdrawal rule?

Personally, I find the volatility of withdrawals and the depth and the duration of withdrawal drawdowns quite troubling. Again, I prefer to tighten the belt by 50% for a while or even a whole decade over ending up completely penniless. But there has to be a better way to deal with sequence of return risk, right?

One method to soften the impact is to tie the withdrawal amount (Wt) to not just the portfolio value (Pt) multiplied by a constant percentage (a) but also to an equity valuation metric, such as the Shiller CAPE, see the formula below. Of course, we would use the CAEY (Cyclically-adjusted Earnings Yield), which is the inverse of the CAPE. Notice that the constant percentage rule is simply a special case of the CAPE-rule if we set b=0 and a=4% (or whatever your desired constant percentage may be):

CAPE withdrawal formula. Notice that the constant percentage rule

Why the Shiller CAPE is uniquely suited for dealing with equity volatility

Let’s look at the mechanics of the CAPE formula in more detail. The problem with the constant percentage rule is that the withdrawal amount is proportional to the portfolio value. The portfolio went down by 30%? So does our withdrawal amount! The CAPE rule, on the other hand, has a way to cushion the drop. If the portfolio value takes a nosedive due to an equity market drop, then the CAPE will drop with it. That means the CAEY, which is the inverse of the CAPE, will then rise. It will not reverse the impact of the portfolio drop but certainly cushion the drop in withdrawals:

Under the constant percentage rule, the withdrawals will move in sync with the portfolio value. In contrast, tying the withdrawals to economic fundamentals has the potential to soften the fall in withdrawals in case of a bear market!

Why would the CAPE fall? The CAPE is the equity price index divided by a 10-year average earnings measure. 10-year rolling average earnings are moving very, very slowly, see the chart below; I plot the S&P500 price index (in 2017 dollars) and the 10-year rolling average earnings (also in 2017 dollars) that Prof. Shiller uses in his CAPE calculation. Notice something? The earnings line is much smoother, specifically, it hardly ever decreases even during recessions. That’s by construction; that’s where the name the name cyclically-adjusted comes from, remember? So when the stock market drops by x%, then, as a rule of thumb, the CAPE drops by roughly that much and thus the CAEY will increase. This will cushion the drop in withdrawals! In other words, by tying our withdrawals to earnings we’re bound to have a much smoother ride in withdrawals!

S&P500 Price Index and 10-year rolling earnings, CPI adjusted and on a log-scale (to make growth rates comparable across time).

Want to see how this cushioning effect works in practice? See the chart below. Whenever the portfolio has poor returns (blue line down) the CAPE-rule cushions the fall in withdrawals by raising the SWR. But it also works in the opposite direction. When the portfolio performs very well, then the SWR will move down again!

1Y portfolio return vs. the 1Y change in the CAPE-based Safe Withdrawal Rate. In response to a drop in the portfolio, the SWR increases! 80% equities, 20% bonds, SWR=1.75%+0.5*CAEY.

Just a side note: we can also expand the formula to include bond and cash yields in the CAPE-based formula because some portion of the portfolio is obviously invested in bonds or cash. I will show an example of that later:

Expanded CAPE withdrawal formula: Include nominal bond and cash yields, too!

Historical simulations of different CAPE rules

Let’s look how different parameterizations of this CAPE-based withdrawal formula would have performed over time. I take 8 different models:

  1. CAPE 1.00/0.5: a=1% and b=0.5. This is the traditional CAPE-based rule that’s set as the default at cFIREsim. With the current CAPE at 30, this implies a pretty measly SWR of just under 2.7%!
  2. CAPE 1.50/0.5: a=1.5% and b=0.5. Because the 1% intercept seemed a bit conservative, let’s raise the intercept by 0.5%.
  3. CAPE 1.75/0.5: a=1.75% and b=0.5. Even slightly more aggressive than Rule 2!
  4. CAPE 2.08/0.4: Let’s see what happens when we lower the CAEY multiplier to 0.4. But in exchange for that, I also increase the intercept to generate the same August 2017 withdrawal rate as rule 3.
  5. CAPE 1.42/0.6: Now, let’s increase the multiplier and lower the intercept. Again we target the same current withdrawal rate as in rules 3 and 4.
  6. “CAPE robust”: I use the Excel solver to maximize the August 2017 withdrawal rate subject to a constraint of never experiencing more than a 30% drawdown in withdrawals over in the post-1950 sample. I let the solver pick the parameters a,b,c, and d. Now I get a weight of 0.359 on the CAPE and +0.102 on the bond yield, but also a negative weight on the cash yield. Makes sense: The bond yield is something inherently nominal while we try to determine a real withdrawal rule. Taking the term-spread between 10-year bonds and cash seems more reasonable for the withdrawal rate rule.
  7. “best of 3” is a weighted average of the rules 4, 6 and 8. The weights are calibrated to again reach the same August 2017 SWR as in rules 3, 4 and 5, i.e., 3.41%.
  8. The constant percentage rule (4%), i.e., a=4% and all other parameters set to zero.
CAPE rule parameters

Some other assumptions:

  • In the portfolio we hold 80% stocks, 20% bonds, rebalanced monthly.
  • The withdrawals take place at the beginning of each month using the end of the previous month’s portfolio value, CAPE and bond/cash yield values.
  • The monthly withdrawal is 1/12 of the amount calculated. To smooth out some of the monthly fluctuations, I look at 12-month rolling withdrawal amounts. This would also make the exercise more comparable to other studies that use annual data only.

Simulation results

In the table below are some stats from my simulations of 12-month rolling withdrawal amounts. The stats I’m interested in:

  • Volatility of 12-month percentage changes in withdrawals
  • Annualized volatility of the portfolio
  • The worst 1-year drop in the withdrawal
  • The worst 20-year drop in the withdrawal
  • The worst 20-year drawdown in the withdrawal (which can clearly be worse than the 20-year-point-to-point drop, when the consumption trough occurs, say, after 12 years).
  • All the above stats are calculated for the entire sample and for the post-1950 period.
  • I also display the drawdown of withdrawals peak to bottom for the 4 prominent crises: the Great Depression, the 1970s (and early 80s), the dot-com bubble and the Global Financial Crisis.
  • These go back to some of the criteria I proposed in Part 11: how to grade dynamic withdrawal rules. Remember, dynamic rules don’t usually run out of money. So we need some other criteria to grade their performance and to compare different rules!


Stats of 12-month rolling average withdrawal amounts. 1871-2017. 80% equities, 20% bonds.
  • The constant 4% rule has consistently the worst volatility and drawdown stats. The withdrawals are roughly as volatile as the portfolio. The drawdowns from the initial withdrawal to the bottom are routinely 50% or more in some of the crises, even close to 60% in the 1970s. So, the retiree during the 1970s would have to be flexible enough to cut annual withdrawals from, say $40,000 to $16,000 per year. Of course, this rule also has the highest current withdrawal rate at 4%. That’s the tradeoff: the more generous the SWR the more flexibility will be required if there’s a bear market!
  • The CAPE-based rules have the same portfolio return volatility (by construction: all simulations are using an 80/20 portfolio). But their withdrawal volatility is significantly smaller than the portfolio volatility and more than 50% smaller than under the constant 4% rule. All of the other risk measures also look much better than under the constant percentage rule. But then again, the current withdrawal amounts implied by the CAPE are roughly 15% smaller. But considering that I have proposed 3.25% elsewhere, I was positively surprised that some of the dynamic rules now imply a withdrawal rate of 3.41% even with a CAPE at 30!
  • Quite intriguingly, the CAPE-rules handled the Great Depression extremely well. The CAPE was at 30+ in 1929 and then dropped to 5(!) in 1932. You would have withdrawn only 3% at the peak and over 10% p.a. at the bottom, so even after a precipitous drop, the withdrawal amount was not reduced that much. But that was OK because the market rebounded very rapidly in the mid-1930s.
  • More challenging than any other crisis in recent history: The 1970s! As mentioned above, between 1970 and 1982 we had four recessions, two of them major. What’s worse, due to the inflation shock and rising bond yields, bonds got hammered and negated any diversifying benefit in this episode! Under the constant percentage rule, a $40,000 initial withdrawal would have been decimated to $16,000 in the early 80s. Withdrawals would have been below $25,000 for 11 straight years, see the chart for the January 1966 retirement cohort, below. Even with the CAPE-based rules, retirees had to tighten the belt by 20 to 36%. It’s better than the roughly 60% drawdown under the constant percentage rule, but the CAPE-rules also took even longer to recover than 28 years!
Withdrawal amounts under different CAPE rules for the January 1966 retirement cohort. 80% equities, 20% bonds. Under the constant percentage rule, a $40,000 initial withdrawal would have been decimated to $16,000 in the early 80s. Withdrawals would have been below $25,000 for 11 straight years!

Other dynamic withdrawal rules:

  • Michael Kitces proposed adjusting the withdrawal rates according to the Shiller CAPE. The adjustments come in discrete steps: SWR=4.5% if CAPE>20, SWR=5.0% if CAPE between 12 and 20, SWR=5.5% if CAPE<12. I find this rule very unappealing. The jumps in the withdrawal rates are a) not big enough to effectively smooth out the withdrawal path and b) are completely discrete so most of the time there is no smoothing at all and we’re back to a simple constant percentage rule with all the unwanted volatility of withdrawals. I also find the 4.5% SWR for today’s CAPE regime quite high. It may be fine for a 65-year old retiree who is comfortable with capital depletion but certainly not for a 35-year old retiree with a potential 60-year horizon.
  • The Bogleheads VPW (Variable Percentage Withdrawals) is a variation of the constant percentage rule. It takes into account that the investment horizon shrinks as people age, thus, the VPW methodology calculates an increasing path of SWRs to account for that. If you’re fine with depleting your capital then that’s an appropriate thing to do. Personally, I’d prefer to preserve the capital for future generations and for charitable causes. But definitely, as a safety margin, one could switch to capital depletion in case of a major drawdown. For example, if after 10 years (or certainly 20 years) of a 60-year retirement horizon we like to increase our withdrawals we could simply switch from capital preservation to (at least partial) capital depletion and easily gain a bump of 20% or more in withdrawals. That will easily bring back the CAPE-based rules back to normal.
  • Guyton-Klinger: We wrote about this method in Part 9 and Part 10 of this series and also in the case study in Part 11. Qualitatively, this method displays some of the same problems as the constant percentage rule: steep and extended drawdowns in withdrawals. The more I look into this rule the more I dislike it. GK puts “guardrails” around the withdrawal percentages. But volatility in withdrawal percentages is not the problem. The volatility of withdrawal amounts is what bothers me! In fact, the CAPE-based rules work so well because of the dynamic withdrawal percentages and their ability to smooth out the market volatility!


Flexibility is a useful tool when dealing with the prospect of a drop in the portfolio value early on in our retirement (Sequence of Return Risk). But it’s also a double-edged sword. While eliminating the risk of completely running out of money after 30 years we increase the risk of steep cuts in withdrawals along the way. If your notion of flexibility is to “maybe forego the CPI adjustments for a few years” or “cut the cable bill for the duration of market drop” then that may be enough flexibility for very small market moves. But major recessions and bear markets require drastic multi-year, even decade-long reductions in withdrawals.

One hedge against this is to tie the withdrawal amounts to economic fundamentals, especially corporate earnings. These CAPE-based rules will withdraw a little bit less than 4% when equities are expensive (i.e., today!), but can also afford a slightly smoother ride through the various bear market scenarios considered here! It’s the natural extension of what we stressed in Part 17 of the series: The safe withdrawal rate has to respond to market conditions (in addition to idiosyncratic factors). But we can’t just set the initial SWR and then never touch it again. We should keep updating the subsequent withdrawal rates to reflect changing economic and financial conditions! A CAPE-based rule can do this and it’s intuitive, systematic and easy to implement!

Thanks for stopping by today! Please leave your comments and suggestions below! Also, make sure you check out the other parts of the series, see here for a guide to the different parts so far!

190 thoughts on “The Ultimate Guide to Safe Withdrawal Rates – Part 18: Flexibility and the Mechanics of CAPE-Based Rules

  1. Thanks for the analysis. We have been intrigued by the CAPE rule, but have not been able to find research on setting the parameter values (a, b, c, and d). Question for you….in this analysis, your scenario #1 had a=1.0 and b=0.5. What were the c & d parameters since you assumed the portfolio was 80% stocks and 20% bonds (and the the c parameter pertains to bonds)? Please keep up the good work and a prosperous 2019!

    1. Great question!
      You know, I tried to play around with the c and d parameters and the results didn’t really change much. I’d like to keep it simple and ignore the bond valuation parameters. As long as you keep the equity portion high enough (70% or better 80%) the equity valuation parameters are all that matter.
      Happy New Year!

  2. In regards to the CAPE-based SWR, and SWR in general, can you please confirm the following in regards to tax treatment? As a simple math example, let’s say the CAPE is 30, and therefore the SWR is 3.17%. Let’s say your investable net worth is $10m, and your LTCG tax rate is 23.8%. Then that means your monthly withdrawal would be $26,389, and your monthly “budget” would be $20,108 after tax dollars, correct? Or in other words, your effective SWR after tax considerations would be a mere 2.41%. Does that make sense?

    Last question, when using the CAPE-based SWR, there doesn’t appear to be any adjustment for CPI-inflation, correct? In other words, SWR is simply just a function of CAPE per the equation [i.e. SWR = 1.5% + 0.5*(1/CAPE)], regardless of inflationary changes over time. Whereas if you’re using a fixed method for safe withdrawal such as $300,000 on $10m in year 1, you’d increase your withdrawal to $306,000 in year 2 (assuming inflation of 2%), $312,120 in year 3, and so on..

    Apologies in advance for the simple questions, double apologies if it’s been addressed elsewhere that I’m not seeing. I’m planning to retire within the next couple years (40 years old), and am just now wrapping my mind around this new stage of life.

    1. Very important point: the withdrawals are pre-tax and for very large portfolios you get a high marginal tax and a large impact from taxes.
      For a $2m portfolio you may be able to keep all of your income in the 0% bracket!
      Also, you pay taxes only on the capital gains not when withdrawing the cost basis.

      The CAPE-based SWR is not explicitly adjusted for inflation, but if you do this right then the portfolio will keep up with inflation and so will your withdrawal ammounts. But there have been instances where the withdrawal amounts fell for extended periods. Which is what all “flexibility rules” do (see parts 23-25). It’s then a matter of figureing out how much erosion of your (real) withdrawals can you stomach.

      1. Thanks! Yes, I figured it would be a big mistake not to consider taxes. There isn’t much on the subject of taxes in the FIRE community in regards to SWR, as I suspect most fall within the leanFIRE and regular FIRE communities and thus have a 0% LTCG tax bracket, but the FatFIRE community is typically overlooked in this regard, I think it’s a good exercise for everyone to consider regardless of portfolio size, as capital gains tax rates could look quite a bit different for everyone 30, 40, 50+ years from now, as the rates varied greatly in years past.

  3. KOW….I won’t reply on the tax question as that is out of my realm. However, on the CPI question I will offer my perspective. The CAPE number inherently reflects the equity market and that same market will have inflationary responses. Therefore, I don’t plan on doing any CPI adjustment when I use the CAPE equation. Keep in mind that the CAPE equation will cause volatility in the annual withdrawal amount. If the volatility is too much, then the “b” parameter can be decreased which lowers the impact form CAPE for that year. Big ERN has done studies on various “a” and “b” parameters in Part 11 of his fantastic series, so it may be worth a read.

  4. Great post!

    I would love to see what that second graph looks like for Japan and the Nikkei.

  5. These calculations, are they for a 30-year retirement? 60-year retirement? Or something else?

    Also, if they are for a portfolio consisting of 80% stocks and 20% bonds, where does the cash yield come into play?

    1. This simulation is not for a particular time-frame. I did one long run of 145 years and checked what the worst 1y drop and 20y drop and 20y drawdown were along this entire long history.
      The 80/20 portfolio simulated here was using only the CAPE. Not the bond yield and not the cash yield either.

  6. A spreedsheet would be nice to play around with. I’m attempting to make one but having difficulty.

  7. Absolutely love this analysis; I’ve been back to this post multiple times over the last few months, and I keep wondering the same thing: why not just use the CAEY as the withdrawal rate? I guess you could have really high withdrawals in a downturn, but at least as it relates to the concern around over-withdrawing during times of high valuation, it seems like an heuristic of “spending the earnings” (not just the dividend) should provide pretty good guidance if you want to avoid capital depletion. I look at my real estate portfolio the same way; I don’t pay attention to the valuation of the property, I only (conservatively) model the earnings that my equity in the property generates after expenses…

    Thanks again for your work!

    1. Thanks!
      You can simulate how that looks like. In the Google Sheet (Part 28) there’s a feature.
      Sett ing a=0 and b=1, you’ll get nasty, permanent declines in purchasing power. Worst is where the withdrawal amount is 72% below the initial amount. It’s not as bad as the 4% Rule (worst case =-100%) but almost as bad.
      The 0.5 factor before the CAEY is the sweet spot:
      at 0.0 (and b=4%) you’d have too much short-term vol
      at 1.0 you’d have too much risk of long-term depletion.
      At 0.5 you balance those two risks.

  8. Given the changes in GAAP accounting principles and historic share buybacks in the stock market, do you find the Shiller CAPE ratio still a reliable predictor or future long term gains? Perhaps a CAPE in the 30s these days is artificially high and thus the market “is just fine” for continued success (Yes I know this comment comes during a bear market, but pandemics kind of do that, not necessarily market fundamentals)?

    1. I certainly do a mental adjustment for the CAPE. A 25 today is not quite as scary as 50 years ago. Good point. But 30 still seems excessive. Not sure we will return to 30 anytime soon, which makes me think that the recovery from this event will take a lot longer than some expect.

  9. Hi eRN
    Love this website! Two terribly dumb questions…first, when you adjust your withdrawal rate, is it based on initial portfolio or current portfolio value? Secondly, which a and b combination do you find works best? Thanks for all that you do!

    1. I’d use b=0.5. The a is tricky. Pick it too high and you risk slowly depleting your purchaing power over time. Pick it too low and you start with a way too low initial budget and live like a miser when you’re 45, but then live large in your 80s and 90s.

      I think a=1% is probably way too conservative. a=1.5% is a good start, maybe even go as high as 1.75%.

  10. Love your articles! I was wondering if you’ve used FIRECalc in any of your analyses and whether you think its results are accurate. I have found it very useful on my path to FI. Specifically, I like the ability to input multiple different variables such as my expected length of retirement, other income/pension (with their various start dates), etc.

    With regard to adjusting the withdrawal rates during retirement, what are your thoughts on using the FIRECalc “Investigate” feature (i.e. annually or semi-annually), inputting my updated numbers, setting the success rate to a desired level (i.e. 100%), and then allowing it to determine the spending level for my set portfolio?

    1. I use my own calculator, see parts 7 and 28. I don’t trust other calculators because they are based on annual data and would miss some of the historically worst retirement cohorts (e.g., 9/1929).
      It’s the #1 reason I wrote my series, remember? 🙂

      1. Hi ERN, I just finished reading Bill Bengen’s recent article October 1, 2020 in Financial Advisor magazine. Link here:
        He references and “expands” upon Kitces work on CAPE vs SWR. Boy do I find his analysis sorely lacking and overly rosy. For one thing he assumes retirees are comfortable holding 20% small stocks in the portfolio…hmmmmm…🤔. And near the end of the article he seems to dismiss and exclude any high CAPE periods as “outliers” maybe because they don’t fit in with his rosy SWRs. Wow. If you have time to read through it I would be interested in your thoughts and insights. Perhaps he needs to be called on the carpet similar to what you did with Bob French’s analysis a year or two ago. Might make for an interesting post?

  11. This is excellent research you’ve done and I’ve been contemplating moving from a SWR approach toward fixed dollar amount withdrawals during my FIRE simulations and this work solidifies my intuitions. Since the purpose of the CAPE adjusted SWR is to stabilize the withdrawal amount regardless of cycle, what advantage do these approaches offer compared to simply budgeting for a rule that’s not closely tied to equity value (like $30,000 that grows 5% per year)?

    Thanks again for your work!

    1. CAPE stabilizes the Withdrawal Amount but the amount will go down if the crash is big enough. So, CAPE is superior as a rational guide to withdrawals. Takes the emotion out. I don’t recommend 3% initial plus 5%p.a. It will work great in a normal environment but could have backfired in some of the bad cohorts in history.

  12. A clarifying question about the CAPE-based SWRs, say the one with a=1.5% and b=0.5: does the SWR get set once based on the market conditions at the time of retirement (and then subsequently gets adjusted for inflation at each withdrawal period) or does the SWR get reset at every withdrawal period (e.g., monthly or quarterly) based on the CAPE ratio at each withdrawal period?

  13. ERN
    How can I utilize this method if I expect federal pension? I am guessing my SWR would be higher but no idea how to adjust it. Thanks!!

      1. Thanks for the response. I am really slow so bear with me. So I plugged in all of my SS and pensions etc and get a SWR X%. The CAPE based rules dont seem to have a way to use your initial SWR from the Google Sheet and adjust based on CAPE…to me it seems like 2 different systems

        1. No, you’re not slow. I’m slow today and misunderstood your question! 🙂

          It’s not something I’ve set up currently. Might be a good idea to write an update on CAPE-based rules that factors in future pensions.
          If you want to roughly gauge how much of a future real or nominal cash flow would make on a SWR, look at this post:

          For example: you have a 50-year horizon, 80/20 portfolio and expect a pension (with COLA) 20 years into retirement and you can start consuming 0.293 (minimum), 0.466 (median) of every (real) dollar you expect in 20 years today.

  14. I’ve come up with an a strategy that I think works well and is perhaps simpler than the CAPE rule. The rule is simply the greater of X% variable or Y% (less than x%) fixed. I’m thinking of using as a safe withdrawal rate the greater of 4% variable or 3.33% fixed, though the X and Y can likely vary based on indiviudal circumstances. In my view, it has the nice feature of having a clear floor as well as an amount for permissable variable spend. There are plenty of times when you’ll be stuck at the floor but in my opinion that’s ok, at least you know what it is.

    Note: I tested this by using the returns from your spreadsheet and then building a macro to loop through all the cases. It had a lower failure rate than even a 3.5% fixed rule with the same (roughly 70/30) portfolio, but also far fewer scenarios where your account value doubled or tripled (which leaves you to just leave money on the table),.

    Thoughts on this?

    1. Not very different from what I propose.
      In the worst cases (1929, 1968) you’d hit the floor within less than a year. So, your rule is not much different from a 3.33% fixed SWR. That might be too conservative for horizons <50 years, certainly more conservative than what I propose.
      When you retire anywhere outside the market peaks, the 4% variable seems a bit too conservative as well.
      Also notice that I very much support walking up/ratcheting up the withdrawals when the market doesn't drop right after you retire.

  15. Hi ERN, thank you for the post.

    Adjusting the SWR using CAPE as you suggest implicitly assumes that expected returns are positively correlated with CAEY. What about making this relationship explicit? What would the formula be?

    1. I like that idea. Yes, that’s on my to-do list!

      There are some challenges.
      It’s a two-stage problem because we need to distinguish short/medium term expected returns (CAPE mostly correlates with about 10y of equity return data) and then afterwards you probably use long-term averages both both stocks and bonds.
      Because of the 2 stages there will not be a simple formula.

  16. As of this morning (c 09:00 UK) the S&P 500 P/E (12 months trailing) is reported as 33.99, see: However – what I think is the corresponding P/E – for Vanguard ETF VOO is 25.6, see:

    Do you know the reasons for this apparent discrepancy and which P/E would you actually use?

    Apologies if you have answered these Q’s above, but I did not find them.

    1. PE ratios are not easily comparable. What do you use as the E?
      1: The 10-year rolling CPI-adjusted earnings (Shiller)?
      2: the 1-year trailing E?
      3: the 1-year forward estimated E?

      Also: currently we only have confirmed E data for Q2 (June 30), even though it’s already past Sep 30. So, do you use the July 1 2020 to June 30 2021 earnings? Or do you see the Oct 1, 2020 to Sep 30, 2021, factoring in one quarter of earnings estimates?

      It’s a real mess! Depending on what measure you use you get wildly different P/E values.

      So, here are come sample results:
      Trailing earnings up to 9/30: 170.17 (PE=25.27)
      Trailing earnings up to 6/30: 128.20 (PE=27.08)
      1Y forward earnings from 9/30: 193.15 (PE=22.26)
      1Y forward earnings from 6/30: 186.39 (PE=23.07)

      (All using the Oct 4 close of 4300. Would have been a % higher is using the Oct 1 close)

      Looks like the Vanguard figure is using the 1-year trailing to 9/30.

      I would not trust data. That’s likely junk.

    2. Addendum: Mystery solved.

      They use earnings data only up to March 31, 2021. That was $128.20 for the 4Q moving average. With a 4300.46 close today that will get you to exactly 33.54. That’s a junk number because the earnings are already 6M outdated!

    3. Karsten,
      Thanks very much for looking at this.
      I had tried a few similar ideas, but could not satisfactorily resolve the puzzle in my own mind. Your curiousity and diligence are very much appreciated!

      OOI, what source/form of CAPE would/do you actually use to implement cape-based rules or is it just a question of being consistent (and alert to the possibility of any changes) and parameterising accordingly?

        1. Hello, the link to the xls sheet is good, but the terms “Additional Info, scroll down to “Index Earnings”, no longer appear to be there!

            1. Very helpful! Sometimes people ask for the non-US CAPE values. This is a nice reference.
              Slightly outdated (end of May data on July 7), but one could extrapolate with the index return and guess today’s values.

              1. June’s is there if you’re careful with the mouse. Or better still export the data sheet.

  17. Hello
    Thank you for this article.
    Would one have to use several CAPE values for the different markets in the portfolio: UK, international, EM. etc. in proportion to the % in the portfolio.? I understand the shiller CAPE is for US equities, is that right ? #thank you!

    1. I calibrated my CAPE WR rules to the US historical simulations. There is no guarantee that this rule would work similarly well in other countries with the same parameters, though.
      Statisitcally speaking: this rule is developed for US time series. It may not work in the cross-section (across countries).

  18. Thanks so much for this series, I learned so much and am truly excited that I have 30 more posts to read.

    My question is:
    If we use a=1.75% and b=0.5% we go below the 3.25% once CAPE goes over 33.33. of we use a=1%/1.5% it happens even sooner. Would you limit (as a floor) you withdrawal rate at some point (for example at 3.25% or 3%) or is ot just a case of “markets are expensive, keeps reducing the SWR”?

    I hope me question makes sense.

    1. You can certainly put a floor. But the idea of a valuetion-based rule like this is that you should lower the withdrawals because expected returns are lower. If you don’t lower the WR it could mean that the drawdown in withdrawal amounts will be really long and painful if a bear market is right around the corner.

  19. I’m sorry but i don’t think this CAPE rule easy to implement at all. Easy is the 4% rule. Look at your formula, I have no idea how to even replace the variables with which value?!?!?!
    Is there any excel file (not your crazy complicated files) that I can just apply the formula and where do I get the variables? Please help

    1. I prefer the constant spending rule because it’s easy to compare across simulations.

      But a simple variable rule would be, set the annual WR to 1.75% + 0.5/CAPE. More cautions would be 1.50% + 0.5/CAPE. Not really rocket science.

  20. Does the CAPE tab assume an 80:20 split? Just wondering as I am at a slightly unusual 95:5 (with the 5% being cash) and I am wondering if I need to adjust the predicted SWR.

    1. Strictly speaking, every asset allocation needs to have its own calibrated CAPE parameters. In my SWR Toolkit you can enter your own asset allocation, 95% Stocks, 5% Cash and then check in tab “CAPE-based Rule” to see how different a/b parameters impact the volatility and drawdowns of your withdrawals.

      I can’t do that for every conceivable asset allocation. That’s why I created the sheet, so people can check for themselves. 🙂

      1. Great so the asset allocation in Parameters is taken into account in CAPE-based Rule. I had been incorrectly assuming that CAPE-based Rule was a standalone worksheet. That is perfect, thank you. Sorry for not realising.

  21. Hello,

    an idea came to my mind about not using a number like CAPE but though consider the market conditions:

    Everything I have read so far deals withdrawal independently of the previous time of saving. One starts from a sum x in order to determine suitable withdrawal rates, etc..

    Wouldn’t it make sense to take into account the accumulation phase (if there is one and it’s not about an inheritance or similar) in order to achieve a better kind of “yield smoothing” over time?
    For example, one could compound all savings instalments accordingly with an assumed average return. Then one would get a virtual deposit value. From this there would be a “generally valid” SWR, possibly depending on the withdrawal period, etc., which would be applied to this virtual deposit value.

    If, for example, one has saved during a long bull market, the real portfolio value would be higher than the virtual one and the SWR related to the real portfolio value would be correspondingly low.
    If, for example, one has saved in a long-term bear market, the real portfolio value would be lower than the virtual one and the SWR in relation to the real portfolio value would be correspondingly higher.

    I really dont know if that makes any sense. 🙂

  22. Dear Karsten,
    Thank you for this informative post!
    Could one mitigate the sequence of return risk in the saving phase by adjusting the savings rate based on the CAPE ratio? – If the CAPE ratio is low, one would invest more per month, if the CAPE ratio is high, one would invest less per month.
    Does this make sense? Would one gain something except a smoother ride till retirement?
    Best regards,

    1. I don’t recommend that. My savings rate was high throughout my entire work career. Even though the CAPE was elevated.
      I certainly recommend using the CAPE to gauge the withdrawal rate, but that doesn’t translate into the accumulation phase.

  23. OK so lets say we take todays CAEY and use the equation you proposed…how can i adjust this rate for the presence of future pension/social security? their existence should increase the SWR predicted by your CAEY-based equations yes?

      1. im so sorry but im really bad at math… how do I discount the future value with those rates when I only know what my predicted income from these sources will be in today’s dollars? For example, I get 20,000 per year in today’s dollars for the pension at age 57 and my wife and I will get a total of70k per year at age 70…does that mean if i calculate the SWR to be 3%, i can add $20000/.03 to my net worth to account for the pension, for e.g.? Again sorry…im real dumb

          1. Let me see if i can give an example….i know that we will receive a pension of 24k (in TODAYS dollars) if i retire in 12 years at age 57 from VA BUT i dont get inflation adjustments until age 62 so really that pension is worth 24000*1.04^5 (conservative estimation of inflation of 4%) or 20000/year (now that its been translated back into TODAYS dollars.) If my initial WR is 3.3% per CAPE rules stated above, could I add $20000/0.033 or ~$606k to my initial portfolio at age 57?

            1. No. 20000/0.033 wouild imply you get an immediate $20k and you’d get it forever. That’s underestimating the first 12 years of no pension. And then you want to set a final age (maybe 100) after which you die and lose the pension.

              Please see this sheet for my calculation. I get $341,000 of extra cash you might consider as your implicit net worth when calculating the CAPE-based withdrawal amount, i.e., Withdrawal amount = (Financial Net Worth+$341,000)*0.033.


      2. Karsten,

        Could one account for future cashflows (COLA like Social Security and non-COLA like some pensions) with CAPE variable SWRs by adding to the SWR using your cash flow translation tool from part 17?

        1. I wouldn’t want to use that tool for each future cash flow, potentially hundreds or monthly Social Security and pension payments. The precise way is also the easier way, as described in my reply to JD, i.e., with a discounted value of future payments. See the Google Sheet.

  24. Great post. You mentioned sharing and example with including the 10-year bond and cash yields into the equation. What typical values do you propose for a,b,c,d in this case? Have you run any sims to show whether there is benefit in including these metrics instead of just CAPE? I’m wondering if the added complexity provides any improvement. Thanks.

      1. Thanks. Haven’t you included bond and cash yields in your “CAPE robust” and “CAPE best of 3” models? Apologies if I am misunderstanding

  25. Hi Karsten,

    I’ve been using recent version of SWR Toolbox and need your help with the following:
    I tried to model a ‘high spend early years’ into the Cash Flow Assist by inputting minus $4000 for monthly spend. I also used 33% as final value (changed from default). I also made a value 1.5% (instead of your default 1.75%). All others are same as your defaults (including ‘new’ CAPE regime calc.). What I get is the the SWR of Capital Preservation is higher at 3.58% than the Target Withdrawal % (3.52%). In actual numbers, it works to $91,573 vs. $91 So, my question is whether the target withdrawal figure is in addition to the additional monthly ($4000) withdrawals (or) whether that includes this already. I have shared my toolbox file with you so can you please take a look at the details and let me know. Thanks!

    1. In the baseline, the way you sent me the sheet, I get a safe consumption amount of $57,097. That’s base consumption and you’d withdraw $48,000 more than that for the first 175 months, i.e., $107,097 per year for the first 175 months.
      If you set the FV target to 100% you get a $47,796, so $95,097 p.a. for the first subsample and $47,796 for the second. Seems intuitive. The higher your final value target, the lower your consumption target.

      1. Thank you Karsten. Maybe I interpreted the CAPE sheet withdrawal amounts differently. Will explore more and get back to you. Appreciate the guidance.

  26. Also, wanted to add the current CAPE ratios are not auto-populating in the version I use. Is there a later version of the spreadsheet I should use?

  27. Hi Karsten, thanks for this resource – it’s brilliant! Quick question regarding the CAPE-based rule on the spreadsheet, if I make monthly calculations using an updated CAPE value for each month; should I then take the target withdrawal ($/month) and increase it by the change in inflation for that month? Or do I not adjust for inflation at all? (I may have asked something similar elsewhere, but night shift has gotten the better of me and I can’t remember one way or the other!)

    1. No. CAPE-based rules take the portfolio value at that time and multiply that value with the CAPE WR. There is no further CPI adjustment necessary. Not that another 0.2% monthly inflation would make a difference.

  28. Yes ‘Withdrawal Rate’, makes sense now thank you.

    Please refer me back to the CAPE part of the series if this has been answered before.

    When I look at Cape in order to calculate an SWR, it strikes me that the numbers can be quite different for different countries. I wondered therefore how this affects where one has their money invested. For example a ceay of 1.5 is very different when applied to the us market as opposed to say Japan. How does one account for this?

    1. My work is focused on the USA asset returns. I claim no coverage of other markets. In most countries the CAPE is a bit lower, this higher earnings yields, so the formula with a=1.5 and b=0.5 would give you a higher WR.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.