How We Calculated Our Early Retirement Safe Withdrawal Rate

We spent years fine-tuning our withdrawal rate before retiring. I reviewed various strategies, and one thing became clear to us: we didn’t want to withdraw a fixed 4% annual amount over the course of 60+ years in retirement.

We retired in July of 2019 and had enough savings to cover our expenses for the rest of the year. This gave us the chance to start a new 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 the Cyclically Adjusted Price-to-Earnings ratio developed by Robert Shiller. Shiller is an American economist who is also well-known in the financial world.

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

I’m not an economist, so please bear with me as I attempt to explain.

CAPE is a method of calculating the value of the S&P 500 equity market in the United States. Divide the price by the average of ten years of earnings, adjusted for inflation, to get the ratio. The higher the CAPE value, the lower the long-term annual average returns will be, 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?

In general, if the number is higher, you should be more cautious with your withdrawal. If the figure is lower than the average, it means that stocks are undervalued, higher returns are expected, and you can withdraw more.

Big Ern’s article, The Ultimate Guide to Safe Withdrawal Rates – Part 18: Flexibility and the Mechanics of CAPE-Based Rules made the most compelling case for a CAPE-based withdrawal.

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 opt for a fixed 3.25 % SWR rather than the traditional 4%. Given the lower expected returns over the next decade, we are hesitant to withdraw more while also beginning with a conservative asset allocation.

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

A spreadsheet to determine the safe withdrawal rate (SWR)

Based on our wants and needs, I created the spreadsheet below. We wanted to see the balance of our stocks and bonds, 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 could also include a formula to calculate bond and cash yields, but I didn’t want to go that route. Big Ern also includes it in his article.

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

The columns in white have formulas formatted on the first row. All I have to do now is fill in the new values at the start 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 case, and the CAEY is 2%, we get a little bump to 2.50%. A high CAPE implies high valuations over a ten-year period.

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

So this is how we came up with guidelines for a safe withdrawal rate.

Final thoughts

If you want to dig deeper into this method, you should read the ERN post that we mentioned. While you’re at it, you might want to read his entire Safe Withdrawal Rate Series, which includes over 30 posts on the subject.

For 2020, our actual SWR is 3.25 %. We decided to make one withdrawal at the start of the year to keep things simple.

As I previously stated, this is not a magic bullet for not running out of money in retirement, but it sure feels better than withdrawing the 4%. We are leaving thousands of dollars in the account each year by being more conservative with our withdrawals.

If we have an unexpected large expense and need to spend more than the suggested amount, we’ll take it knowing that in previous years we withdrew much less than 4%.

I’d like to make a few points:

Any dividends received in the brokerage account are not reinvested and are kept as cash for the coming year as part of our cash/bonds asset allocation distribution. This is not a large sum because the majority of our funds are in retirement accounts.
We started the Roth IRA conversion ladder in 2020, in order to access a portion of our retirement funds before turning 59-1/2.
I didn’t mention the risk of sequence of return and what else we did to mitigate it. That will be covered in a later article.

Here’s the link to the spreadsheet I highlighted above. The spreadsheet is read only. To make changes, you must first save it.

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


After dedicating 13 years of his career to Vanguard, José retired from the corporate world at the young age of 44. During his tenure at Vanguard, he expertly coordinated the production of both electronic and print educational materials for 401(k) participants. Now, he relishes in his early retirement, cherishing time spent with his family, indulging in his favorite hobbies, seeking out new experiences, and savoring meals in the comfort of his own backyard.

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9 months ago

Thanks for this, very interesting. Would you adjust the actual withdrawal for inflation? I cannot see that in the spreadsheet, or am I missing something?

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