Author Topic: Help me understand the Variable CAPE SWR  (Read 3070 times)

Mmm_Donuts

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Help me understand the Variable CAPE SWR
« on: September 22, 2016, 08:20:40 AM »
I'm interested in having a variable withdrawal rate in FIRE, so I'm looking into the various methods. One that I keep coming across (and the MadFientist talks about) is the Shiller CAPE method of determining a SWR based on the 10 year average P/E. It sounds good, and resolves (I think?) some of the issues talked about in this thread, where the OP noted the risk in retiring at the peak of the market.

Here's how I understand the Shiller CAPE SWR. It's the inverse of the P/E ratio, meaning that at the peak of the market, you withdraw *less*, because the market is then overinflated. When I look at the Shiller PE ratio chart here it would mean withdrawing at a rate of 2.2% at a market peak like December 1999 and withdrawing at a rate of over 20% at the market's lowest point (Dec 1920.)

On the one hand this makes sense - withdraw less at the peak of the market because your assets are inflated. But I don't understand the other side of this. How could you withdraw MORE when the market is dipping? Isn't this a form of selling low, buying high?

On the cFiresim site, in the FAQ it says:

Quote
The CAPE method adjusts your retirement based on this valuation of the market (spending more in the boom times, and less in the down times).

But to find the variable rate we are taking the *inverse* of the P/E, so the SWR actually does the opposite of the market.

Am I totally misunderstanding how this works? I'd just like to have some sort of measurable guideline on how to vary the SWR.

Axecleaver

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Re: Help me understand the Variable CAPE SWR
« Reply #1 on: September 22, 2016, 09:08:48 AM »
It isn't a variable rate; just like with the 4% SWR rule, the withdrawal amounts don't change (sans inflation) once you fix your retirement date. You fix the SWR once when you retire, and regardless of what happens to your balance, you don't change the withdrawal amounts. It's not 4% of whatever your balance is on the day you withdraw.

This tool tells you that if the market is high when you retire, then you should set your SWR low (4%), because a crash is coming. If the market is low and you retire, you can afford to take a higher SWR (7-9%) forever, because the first ten years are likely to see a boom, and you will have avoided the sequence of returns risk.

Keep in mind that the correlation between CAEP (earnings over price - the inverse of CAPE) and a SWR is still only 79% - this is a handy predictive tool, but I don't know that I would bet my retirement on it. Rather I'd use this to determine if I was retiring at a "good" time relative to the CAPE ratio, and with the understanding that there were escape valves (using a variable SWR among them) if things didn't go well for the next ten years.

Prudent retirees would look to see that there was a gap between the CAEP predictive SWR and their actual, planned SWR before they pulled the trigger. Would you feel safe retiring on a 9% SWR? This tool says you could have done that in 1920, but I wouldn't have.

Mmm_Donuts

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Re: Help me understand the Variable CAPE SWR
« Reply #2 on: September 22, 2016, 09:21:26 AM »
Ah, ok that makes more sense. If you have $1m at the bottom of the market, you would be able to withdraw at a higher percentage of the initial amount vs. starting off with the same amount at a peak.

But... It doesn't look like the cfiresim calculations work that way. Spending rate seems to be determined by a multiplier of the year by year CEAP, with floor and ceiling amount inputs. And it's called "Variable CAPE." The calculations are described at the bottom of the FAQ:

http://www.cfiresim.com/faq.php

boarder42

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Re: Help me understand the Variable CAPE SWR
« Reply #3 on: September 22, 2016, 09:31:05 AM »
you're mixing up two different things. shiller PE CAEP is used to predict what you can reasonably with draw forever.  there are multiple other variable withdrawal methods you can use based on previous market returns etc. in the end everyone has a variable withdrawal rate you arent spending the exact same every single year.

boarder42

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Re: Help me understand the Variable CAPE SWR
« Reply #4 on: September 22, 2016, 09:51:32 AM »
https://www.bogleheads.org/wiki/Variable_percentage_withdrawal

i think this is what you're mixing up with the CAEP from madfientist.  some good reading and thoughts in there.  also forummm has a good post if i can find it on his variable withdrawal strategy that is a 6% SWR essentially ... but some years its 0

arebelspy

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Re: Help me understand the Variable CAPE SWR
« Reply #5 on: September 22, 2016, 10:16:07 AM »
also forummm has a good post if i can find it on his variable withdrawal strategy that is a 6% SWR essentially ... but some years its 0

This thread:
http://forum.mrmoneymustache.com/ask-a-mustachian/planning-for-a-6-withdrawal-rate-am-i-crazy/

Has a fantastic spreadsheet.  The idea is get a baseline level of minimum spend, then many years you can spend even more (if market is up), and cut expenses when market is down.
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Mmm_Donuts

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Re: Help me understand the Variable CAPE SWR
« Reply #6 on: September 22, 2016, 10:33:37 AM »
Interesting. Thanks ARS and boarder42, I have some reading to do.

I still don't understand the Variable CAPE setting on cfiresim, but maybe this will become clearer (or maybe I just won't use it.)

scottfromsf

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Re: Help me understand the Variable CAPE SWR
« Reply #7 on: November 30, 2017, 06:43:53 PM »
I know this is an old topic but I'm leaving this here for people who wind up on this page via Google. Early Retirement Now has a good article on variable SWR using CAPE: https://earlyretirementnow.com/2017/08/30/the-ultimate-guide-to-safe-withdrawal-rates-part-18-flexibility-cape-based-rules/

arebelspy

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Re: Help me understand the Variable CAPE SWR
« Reply #8 on: December 01, 2017, 03:23:48 AM »
I know this is an old topic but I'm leaving this here for people who wind up on this page via Google. Early Retirement Now has a good article on variable SWR using CAPE: https://earlyretirementnow.com/2017/08/30/the-ultimate-guide-to-safe-withdrawal-rates-part-18-flexibility-cape-based-rules/

Now that's a worthy reason to bump an old topic.

Thanks for sharing, and welcome to the forums! :)
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
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