I have posted Entry #359 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Is the Year 2000 Retiree Safe Yet?
Juicy Excerpt: The usual rule that a retirement is safe if it does not experience a price crash within the first 10 years may not apply this time around. The annualized real return for stocks from January 2000 through December 2016 was 2.27 percent. A portfolio from which a 4 percent withdrawal was taken 18 times would be reduced to under $700,000.
That’s obviously not good. But in ordinary circumstances, this retirement would be highly likely to survive 30 years because the hit that it had to take as a result of the starting-point valuation level would be in the past. When stocks are priced at reasonable levels, returns are good enough to support withdrawals of a good bit more than 4 percent. So the lost ground could be made up over time.
Stocks are priced today at two times fair value. The price we must pay for not having experienced a lasting price crash despite the high starting-point valuation level is that a lasting price crash remains unfinished business. There has never in the history of the US market been a secular bear market that ended before the P/E10 level dropped to 8 or lower. A drop to 8 would take the value of that $700,000 portfolio to something in the neighborhood of $200,000. A retiree who continued to take $40,000 withdrawals from a portfolio of $200,000 for another 12 years would be asking for trouble.