I’ve posted a Guest Blog Entry at the Retire Happy blog. It’s called Retirement Planning As If Valuations Mattered.
Juicy Excerpt: Safe withdrawal rate analyses look to worst-case scenarios. If you want the highest safe withdrawal rate possible when stock valuations are high, you need to go with a very low stock allocation. But you might be able to juice up your return a bit by going with a higher stock allocation so long as you understand that you are taking on more risk by doing so. How much more risk?
In this scenario, a stock allocation of 20 percent offers a safe withdrawal rate of 3.90 and a stock allocation of 60 percent offers a safe withdrawal rate of 3.43. The safe withdrawal rate is defined as the withdrawal rate that has a 95 percent chance of working out, presuming that stocks perform in the future at least somewhat as they have always performed in the past. Please move your eye from the “Safe Withdrawal Rate” column to the “Reasonably Safe” column for the 60 percent allocation. The withdrawal rate moves up to 3.89 percent, as good as the safe withdrawal rate for the 20 percent stock allocation.