How We Figured Out Our Early Retirement Safe Withdrawal Rate

A friend of ours wanted to know our withdrawal strategy and we figured it would be better to write a post about it. I’ve been meaning to write this post for a while but couldn’t seem to get to it.

What better chance to do it than now that we’re being asked about it? 😉

Prior to retiring, we spent years tweaking what our withdrawal rate would be. I reviewed different strategies and one thing became clear to us: we didn’t want to just withdraw a fixed 4% amount on an annual basis against the backdrop of 60+ years in retirement.

We retired in July of 2019 and had savings that took care of our expenses for the rest of that year. This gave us the opportunity to start with a fresh portfolio withdrawal in January 2020.

CAPE-based withdrawals

Our withdrawal strategy is based on a CAPE-variable rate.

What’s a CAPE-based withdrawal?

It’s a variable withdrawal based on Robert Shiller’s Cyclically Adjusted Price-to-Earnings ratio. Shiller is an American economist and he’s also well respected in the field of finance.

Ok, that sure was helpful! Let’s dig further into it.

I’m definitely not an economist, so I’ll try to explain as best as I can. CAPE is a way to measure the value of the US S&P 500 equity market. You get the ratio by dividing the price by the average of ten years of earnings, adjusted for inflation. The higher CAPE value implies that lower than average long-term annual average returns are coming and vice-versa.

CAPE ratio = price/average earnings for ten years, inflation-adjusted

CAPE Ratio – Median is 15.79

How does this help someone withdrawing in retirement?

Basically, if you see a higher number, you should be more cautious with your withdrawal. If the number is below average that means that stocks are undervalued, higher returns are projected, and you can withdraw more.

The most convincing argument for a CAPE-based withdrawal came from Big Ern’s article: The Ultimate Guide to Safe Withdrawal Rates – Part 18: Flexibility and the Mechanics of CAPE-Based Rules.

According to the article, to figure out your withdrawal rate you’d use the CAEY (Cyclically-adjusted Earnings Yield), which is the inverse of the CAPE.

If we weren’t withdrawing a variable rate, we’d probably go for a fixed 3.25% SWR, instead of the traditional 4%. Given the lower returns expected over the next decade, we don’t feel as comfortable withdrawing more while also starting out with a conservative asset allocation of 60/40 (stocks/bonds).

One thing that we’re doing differently is that we’re using a variation of the CAPE-based withdrawal method.

A spreadsheet to determine safe withdrawal rate (SWR)

I created the following spreadsheet based on our needs and wants. We wanted to see our stocks and bonds balance, the CAPE ratio, the suggested withdrawal amount for stocks and bonds, our actual withdrawal amount, and what the 4% withdrawal rate would’ve been for reference.

You can also include a formula to add bond and cash yield but I didn’t want to go down that path. Big Ern provides it in his article as well.

Here’s an example of how we set up the spreadsheet. The numbers do not reflect our real balances.

The columns in white have formulas formatted on the first row. Now all I need to do is fill out the new numbers at the beginning of the year in the highlighted columns.

In January 2020, we reported our balance in the Stocks and Bonds/Cash columns. That generated a total in Portfolio Balance.

Next, I input the CAPE (Shiller PE ratio) for January 1st which was 30.99. (You can hover over the spreadsheet header to see the link)

After inputting the CAPE ratio we can derive the inverted CAEY. Formula = (1/CAPE)

The formula for SWR = a + (b x (1 / CAPE)). Where a is the intercept of 1.5 and b is the multiplier of .5.

Based on this formula, the suggested withdrawal rate is 3.11% or $30,356. I like round numbers. In our case, we ended up rounding the SWR to 3.25%. After all, this is a suggested amount and there’s no silver bullet, no matter what low amount we withdraw.

You can play around with different numbers for the CAPE to see what it may suggest for SWR.

I played around with some CAPE ratios to see where the SWR would land.

In times when the CAPE is high, 50 in this instance, and the CAEY is 2%, we get a little bump to 2.50%. A high CAPE means high valuations for a period of ten years.

When “stocks are continuously on sale” and the CAPE is as low as 20, our SWR is 4.00%. A low CAPE means valuations are low.

So this is how we figured out guidelines for what safe withdrawal rate to use. If you want to analyze this method more in-depth then you should check out the post from ERN that we referenced. While you’re at it, you might want to check out his entire Safe Withdrawal Rate Series that has over 30 posts on this topic.

Our actual SWR for 2020 is 3.25%. For simplicity, we decided to do one withdrawal at the beginning of the year. As I mentioned earlier, this is not a silver bullet against running out of money in retirement but it sure feels much better than withdrawing the 4%. By being more conservative with our withdrawals, we’re leaving thousands in the account each year that will continue to compound.

If we have a bad year and need to spend beyond the suggested amount, we’ll take it knowing that in other years we withdrew much less than 4%.

A few points I want to bring up:

  • Any dividends in the brokerage account do not get reinvested and are kept there as cash for the upcoming year, as part of our cash/bonds asset allocation. This is not a big amount since most of our funds are in retirement accounts.
  • To access part of our retirement funds before we turn 59-1/2, we started doing the Roth IRA conversion ladder this year.
  • I didn’t mention sequence of return risk and what else we did to mitigate it. We’ll talk about that in a future article.

Here’s the link to the spreadsheet I highlighted above. The spreadsheet is read only. You’ll need to save it in order to modify it.

If you’re retired or planning to retire soon, what are you basing your annual retirement withdrawals on?


José worked at Vanguard for 12 years, helping create electronic and print educational materials for 401(k) participants. He retired at 44 from corporate America and loves to spend time with his wife and daughter, discovering new adventures or just sharing a meal in their backyard.

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