CAPE-Based Withdrawals

The CAPE-based withdrawal strategy is a modified version of the Percent of Portfolio withdrawal strategy. It avoids extreme year-to-year fluctuations in withdrawal rates by incorporating the CAPE into the yearly withdrawal. The CAPE is a value that is correlated with expected future earnings.

The equation for the CAPE-based withdrawal method is as follows:

(a + b * CAEY) * P

Where a is the base withdrawal base, b is a weight of how much to factor in the CAPE, CAEY is equal to 1/CAPE, and P is the current-year portfolio value.

Strengths

  • It responds to market conditions, increasing risk of success by reducing spending when the market is performing poorly and increasing spending when the market does well.
  • It responds smoothly to market conditions, so that year-after-year changes to your withdrawal are small, unlike the Percentage of Portfolio strategy
  • It has a low likelihood of exhausting your portfolio, even over long retirement lengths.
  • It's algorithm is straightforward enough to calculate annual withdrawals by hand

Weaknesses

  • Like all withdrawal strategies that vary based on market conditions, annual withdrawals can become too low without a minimum withdrawal in place.