The Fact That the Safe Withdrawal Rate Changes Tells Us More Than the Number Itself

The Fact That the Safe Withdrawal Rate Changes Tells Us More Than the Number Itself
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I used to post regularly at a Motley Fool discussion board focused on planning for early retirement. Our favorite topic was the safe withdrawal rate, which Buy-and-Holders claim is always 4 percent. The huge bull market of the late 1990s had doubled stock prices and cape levels in a short period of time. So millions of people who in 1996 had not saved anything close to enough to support a safe retirement now were looking at portfolio statement numbers plenty big enough to support a belief that they could retire with 100 percent safety. Naturally, this made lots of people very excited.

CAPE levels and long term returns

I stepped into a hornet’s nest when I advanced a post questioning the premise of the discussions. Shiller’s research shows that valuations affect long-term returns, I noted. Thus, stock investment risk is a variable, not a constant. The safe withdrawal rate is a measure of risk and so it is a logical impossibility that it is always 4 percent. It can drop to as low as 1.6 percent at times of super high valuations and rise to as high as 9 percent at times of super low valuations. The people in our community who were handing in resignations from high-paying jobs based on what they heard about safe withdrawal rates in our community discussions were engaging in reckless behavior.

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I was shocked by the reaction to the post. Many community members thanked me profusely for launching the most helpful discussion in the history of the board. Many others, a much larger number, said that I was off my meds and that the discussion needed to be put to rest immediately by any means possible. It was these reactions that caused me to develop grave doubts re the legitimacy of the Buy-and-Hold Model for understanding how stock investing works. I feel those doubts today stronger than ever. I realize today that the challenge that I raised to Buy-and-Hold with my post was of a far more fundamental nature than I realized when I advanced it.


That was 17 years ago. I have crafted millions of words over those 17 years in response to criticisms of me and my work advanced by my Buy-and-Hold friends. Would you care to guess what percentage of those words were aimed at coming to a better understanding of what the safe withdrawal rate is when each of the various CAPE levels apply?

The answer is: zero.

I have put forward words saying what the safe withdrawal rate is at the various CAPE levels. So I have done my part to get discussions started on this question. But there has never once been a case in which a Buy-and-Holder engaged. I have seen cases in which Buy-and-Holders have acknowledged that it might make sense to use a somewhat higher withdrawal rate when valuations are high. But there is not one case in which someone on the other side of the table was willing to say that the safe withdrawal rate can ever be a number other than 4.

Buy-and-Holders don’t respond to my claim that the safe withdrawal rate was 1.6 at the top of the bubble by saying that, no, a better number is 3.5 percent or 3.0 percent or 2.0 percent. For the Buy-and-Holders, the safe withdrawal rate is always 4 percent and there is nothing more to say about the subject.

Cape levels and withdrawal rates

That’s the dispute. There has never been any controversy over what the true number is at any of the various CAPE levels. The controversy is over whether the matter is something which may be discussed. If it were possible for different people to offer different thoughts, it would be possible for a compromise to be reached. It could be that some would say that the safe withdrawal rate was 4 percent even at the top of the bubble and that some would say that the number was 1.6 at the top of the bubble and that some would offer support for numbers somewhere between those two possibilities.

Advocates for each possible position would offer their arguments and people listening in would form their own assessments based on what they had heard from those representing each point on the spectrum of opinions.


You can’t do that.

Not according to the Buy-and-Holders.

At what point are stocks so overpriced as to not represent a good investment choice? That’s a similar question, a question that may not be discussed, according to Buy-and-Holders, a question that makes no sense, according to Buy-and-Holders. Stocks are always a good investment choice. That’s a root assumption of the Buy-and-Hold Model.


Trying to identify a price at which stocks are no longer worth buying is like trying to identify an amount of wealth that is too great to possess. It’s an absurd inquiry under the rule of the game under which such speculations are usually entertained.

My root assumptions are different. I believe that there is a price at which stocks no longer represent a good investment choice. I believe that the safe withdrawal rate is a number that varies in response to changes in valuation levels. Additionally, I believe that questions of this sort are of critical importance for those seeking to acquire a solid understanding of how stock investing works in the real world. The issue of what the safe withdrawal rate is at each CAPE level is of relatively slight importance. The really big one is -- Does it change?

If we live in a world in which the safe withdrawal rate changes in response to changes in valuation levels, we live in a world never imagined by the experts who developed the Buy-and-Hold Model in the days before Shiller published his Nobel-prize-winning research findings. Shiller changed the world and now we are waiting for his findings to “click” in the minds of our Buy-and-Hold friends and send us off on a learning adventure that will permit us all to live far richer lives in days to come.

What is the safe withdrawal rate? It depends.

How exciting.

Rob’s bio is here.

Updated on

Rob Bennett’s A Rich Life blog aims to put the “personal” back into “personal finance” - he focuses on the role played by emotion in saving and investing decisions. Rob developed the Passion Saving approach to money management; Passion Savers save not to finance their old-age retirements but to enjoy more freedom and opportunity in their 20s, 30s, 40s, and 50s - because they pursue saving goals over which they feel a more intense personal concern, they are more motivated to save effectively. He also developed the Valuation-Informed Indexing investing strategy, a strategy that combines the most powerful insights of Vanguard Founder John Bogle and Yale Professsor Robert Shiller in a simple approach offering higher returns at greatly diminished risk. Tom Gardner, co-founder of the Motley Fool web site, said of Rob’s work: “The elegant simplicty of his ideas warms the heart and startles the brain.”
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  1. And scores and scores of e-mails to me (during the time that we were working on the peer-reviewed research that we co-authored) telling me how excited he was to discover Valuation-Informed Indexing.

    Wade’s research benefited every investor alive on the planet. We all would be better off if he had never been threatened.

    My sincere take.


  2. Rob keeps repeating this stuff because he never got over John Greaney embarrassing
    him on this issue 17 years ago. What’s worse is that Wade Pfau wrote a whole article explaining how Rob was wrong on this issue.

  3. It’s a techie issue, Dan. Very boring stuff.

    I have reason to believe that it will be back up by the end of this week.


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