What is the current CAPE ratio and what does it mean?

The current CAPE ratio is around 28-30. A CAPE ratio above 25 suggests stocks are expensive and future returns may be lower. Below 15 suggests stocks are cheap and future returns may be higher. This helps determine safe withdrawal rates.

How does CAPE withdrawal compare to the 4% rule?

CAPE withdrawal is adaptive - when CAPE is high, withdrawal rates are lower (around 3-4%). When CAPE is low, rates are higher (5-6%+). The 4% rule is fixed regardless of market conditions. CAPE withdrawal often provides higher income in normal markets.

Is CAPE withdrawal better for UK retirees?

CAPE withdrawal works well for UK retirees but uses US market data. UK-specific CAPE ratios would be more accurate but have less historical data. Many UK retirees use US CAPE as a proxy since markets are globally correlated.

How often does CAPE withdrawal adjust?

Annually at the start of each year, based on the previous year's December CAPE ratio. This provides stable income throughout the year while adapting to long-term market valuation changes.

What happens if CAPE ratios stay high?

High CAPE ratios mean lower withdrawal rates (3-4%). If CAPE stays elevated for years, you'll withdraw less than the 4% rule, but your portfolio should grow faster. When CAPE eventually falls, your withdrawal rate increases.

Can I use CAPE withdrawal with other strategies?

Yes, CAPE withdrawal works well in hybrid approaches. Use CAPE for base income, add Guyton-Klinger guardrails for safety, or use CAPE for essential expenses and 4% rule for discretionary spending.

How reliable is CAPE for predicting returns?

CAPE explains about 40% of future 10-year returns. It's not perfect but is one of the best single indicators available. Using it alongside other factors (dividend yields, interest rates) improves accuracy.

Should I use CAPE withdrawal if I'm retiring early?

CAPE withdrawal can work for early retirees but requires careful planning. Early retirement means more years in retirement, so the adaptive nature of CAPE helps. Consider using a more conservative baseline or combining with other strategies.

Educational use only: This platform provides information for educational purposes and should not be considered financial, investment, or legal advice.

What is CAPE Withdrawal?

A strategy that looks at how expensive the stock market is today to tell you how much you can safely spend tomorrow.

Valuation Matters

The Shiller CAPE (Cyclically Adjusted Price-to-Earnings) ratio is a measure of whether the stock market is cheap or expensive relative to historical earnings.

The Logic: When the market is expensive (high CAPE), future returns are likely to be lower, so you should withdraw less. When the market is cheap (low CAPE), future returns are likely to be higher, so you can safely withdraw more.

How It Works

High CAPE (Expensive Market)

Example: CAPE > 30.
Action: Lower your withdrawal rate (e.g., to 3% or 3.5%).

Low CAPE (Cheap Market)

Example: CAPE < 15.
Action: Consider a higher withdrawal rate (e.g., 4% to 4.5%).

The Formula

A simple rule derived from CAPE is:

Withdrawal Rate = CAEY + 1.5%

*CAEY = Cyclically Adjusted Earnings Yield (1 / CAPE).

Pros and Cons

The Upside

Data-Driven: It uses objective market valuation data rather than guessing.
Preservation: It's extremely effective at preserving capital because it reacts to valuation risks before they fully materialize.
Responsive: Helps you avoid overspending during market bubbles.

The Downside

Volatile Income: Your allowable spending can fluctuate significantly from year to year as market valuations change.
Too Conservative? In prolonged bull markets (like the 2010s), it might suggest uncomfortably low withdrawal rates, causing you to underspend and die with too much money.

Checking Market Conditions

Understanding current market conditions is key to this strategy. Delphina tracks global market indicators to help you make informed decisions.

View Market Trackers

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