... I'm curious as to whether anyone is convinced by my analysis that a 4% SWR with a CAPE of 30 is dangerous, considering that my analysis showed that it failed 45% of the time when the CAPE is over 21 considering we are at 30 (and I doubt accounting adjustments would reduce it below 21).
...
"dangerous" ? I'm not convinced at all. Why? Because it's a selective and arbitrary subset based on... 1 poorly estimated parameter [CAPE] combined with 100% equity [again, based on... a vague opinion that bond yields are too low even tho 25-50% bonds historically have increased success rates vs 100% equity] and rigid withdrawals. (But to clarify GenXBiker, it
was an interesting experiment, and I do appreciate the effort!)
The Trinity Study et al - using all available data at the time - shows that increased withdrawal % lowers your historical portfolio survival chances, assuming rigid withdrawals and US equity/bond mix. It concludes (my summary) a <3.5% WR is really safe (100%), 4% safe-ish (95%), and it gets worse as you go higher. And because it looked over long periods in the past this takes account of all sorts of nasty events (wars, high inflation, multiple recessions and market crashes, techology, etc etc). OK. Hence "the 4% rule".
BUT...
The current CAPE 'markets are overvalued' argument is not a secret. Yet the market continues to climb. I just don't think you can use this one parameter in isolation from the myriad other key points that impact investment returns (and clearly neither does the market). Things that seem a bit different lately to historic norms:
- bond yields are historically very low (although still not as low as Germany or Japan)
- one off accounting changes that have increased CAPE ratios since 2001 (by about 20%)
- GFC effect increasing current CAPE (because of 10 yr lookback effect)
- higher earnings growth yet fewer dividend payments
- Quantitative easing
- increased share buybacks
- high valued big tech companies that don't currently make much in earnings
- higher international earnings % for US companies
Thus the impossibility of relying on any historic analysis to confidently predict the future with the sort of precision some people seems to be relying on. The solution IMHO is not to fear high valuations and target a 3% WR by working a lot longer, but to prepare to be a bit flexible* wrt expenditure and go with 4%. Heck, if I just plug my expected Social Security payments into FIREsim I can go to 5%. Some decent rental property might push it even higher.
'The sky is not falling' comment is because so much commentary seems to be trying to make people afraid. I prefer to deploy the MMM Optimism Gun
http://www.mrmoneymustache.com/2012/10/03/the-practical-benefits-of-outrageous-optimism/
*Now, if I was say, an actuary responsible for a company pension fund where a resulting need for 'flexibility' in payouts would get me tarred and feathered, OK, I can see why reducing forward total real return expectations down a bit is a wise recommendation given current high CAPE, lower bond yields and rising life expectancy. And maybe adding some international equity because their PE ratios are a lot lower.