CAPE-Based SWR
Adjust your initial withdrawal rate up or down based on the current Shiller CAPE ratio, withdrawing more when stocks are cheap and less when they are expensive.
How It Works
The CAPE-Based SWR method uses the Cyclically Adjusted Price-to-Earnings ratio (CAPE or Shiller PE) to set a smarter starting withdrawal rate. The CAPE ratio divides the current stock price by the average of the last ten years of inflation-adjusted earnings, smoothing out short-term fluctuations to give a picture of whether the market is historically cheap or expensive.
The logic is straightforward: when the CAPE is high (stocks are expensive relative to earnings), future expected returns are lower, so you should start with a lower withdrawal rate. When the CAPE is low (stocks are cheap), future returns are likely higher, so you can afford a higher initial rate. This is a meaningful improvement over the standard 4% Rule, which uses the same rate regardless of whether you retire at the peak of a bubble or the bottom of a crash.
After calculating the CAPE-adjusted initial rate, the method works like the 4% Rule going forward: your Year 1 dollar amount is adjusted for inflation each subsequent year. The CAPE only sets the starting point; it does not trigger ongoing adjustments (though a more advanced variant could recalculate annually with updated CAPE data).
The Formula
Year 1:
adjustedSWR = baseSWR × (medianCAPE / currentCAPE)
adjustedSWR = clamp(adjustedSWR, 2.5%, 6.0%)
withdrawal = initialPortfolio × adjustedSWR
Year 2+:
withdrawal = previousWithdrawal × (1 + inflationRate)
Key parameters:
- Base SWR: 4% (the standard starting point)
- Median CAPE: ~16.5 (long-term historical median for US equities)
- Current CAPE: User-provided or fetched from market data
- Bounds: 2.5% minimum, 6.0% maximum (prevents extreme rates)
How the adjustment works:
- CAPE at 16.5 (median): SWR = 4.0% (no adjustment)
- CAPE at 33 (expensive): SWR = 4% x (16.5/33) = 2.0%, clamped to 2.5%
- CAPE at 11 (cheap): SWR = 4% x (16.5/11) = 6.0%
Pros & Cons
Advantages:
- Accounts for current market conditions when setting withdrawal rate
- Research-backed approach grounded in decades of CAPE data
- Reduces the risk of starting retirement with an unsustainably high rate during a bubble
- Allows higher withdrawals when markets are genuinely cheap
- After Year 1, operates with the simplicity of the 4% Rule
Limitations:
- Requires knowing the current CAPE ratio (readily available but an extra step)
- CAPE is not always predictive of short-term returns — it works better over 10+ year horizons
- Only adjusts the starting rate — does not adapt to changing valuations during retirement
- US-centric: the historical median CAPE is based on US market data
- The 2.5%-6.0% clamp is somewhat arbitrary
Example
Starting portfolio: $1,000,000 | Base SWR: 4% | Median CAPE: 16.5 | Inflation: 2.5%/year
Scenario A — Retiring when CAPE is 30 (expensive market):
adjustedSWR = 4% × (16.5 / 30) = 2.2% → clamped to 2.5%
| Year | Portfolio (start) | Withdrawal | Notes |
|---|---|---|---|
| 1 | $1,000,000 | $25,000 | 2.5% CAPE-adjusted rate |
| 2 | $1,040,000 | $25,625 | Inflation-adjusted |
| 5 | $1,095,000 | $27,600 | Still tracking inflation |
| 10 | $1,060,000 | $30,800 | Lower initial rate preserves portfolio |
Scenario B — Retiring when CAPE is 12 (cheap market):
adjustedSWR = 4% × (16.5 / 12) = 5.5%
| Year | Portfolio (start) | Withdrawal | Notes |
|---|---|---|---|
| 1 | $1,000,000 | $55,000 | 5.5% CAPE-adjusted rate |
| 2 | $1,010,000 | $56,375 | Inflation-adjusted |
| 5 | $1,150,000 | $60,800 | Cheap starting point = likely strong recovery |
| 10 | $1,350,000 | $67,800 | Portfolio grew despite higher withdrawals |
The difference is dramatic: the same $1,000,000 portfolio yields $25,000/year in an expensive market versus $55,000/year in a cheap one.
When to Use This Method
The CAPE-Based SWR works best for retirees who:
- Want a more informed starting point than the flat 4% Rule
- Are comfortable with the concept of market valuations
- Are retiring at a time when CAPE is notably high or low (the method adds the most value at extremes)
- Prefer a simple post-retirement experience (inflation-adjusted fixed dollar after Year 1)
Consider Valuation-Informed Withdrawals if you want a simpler version of this concept without needing the actual CAPE number. Consider a fully dynamic method if you want ongoing adjustments throughout retirement, not just at the starting point.
Compare CAPE-Based against other strategies using your own numbers in the Scenario Builder.
References
- Shiller, Robert J. Irrational Exuberance. Princeton University Press, 2000 (3rd edition 2015).
- Shiller, Robert J. "Online Data." econ.yale.edu/~shiller/data.htm
- Pfau, W. D. (2017). "The Role of the CAPE Ratio in Retirement Withdrawal Strategies." Retirement Researcher.