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:
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.