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
a is the base withdrawal base,
b is a weight of how much to factor in the CAPE,
CAEY is equal to
P is the current-year portfolio value.
- 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
- Like all withdrawal strategies that vary based on market conditions, annual withdrawals can become too low without a minimum withdrawal in place.