I’ve posted Entry #377 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Studying Safe Withdrawal Rates Is the Best Way to Learn How the Stock Market Works.
Juicy Excerpt: The safe withdrawal rate concept is a long-term concept. It’s not possible to tell someone how realistic their retirement plan is by seeing how it performs in one year or two years or three years. And it is not helpful to tell them that it will take 20 years for them to know whether the plan is going to work or not. Aspiring retirees need to know how plans that stretch far into the future are going to work but need that information on the day the retirement begins. They need long-term guidance, not short-term guidance. But they need that guidance provided in the short-term.
The magic of Shiller’s research showing that today’s P/E10 level offers highly accurate predictions of how stocks will perform 10 and 15 and 20 years out provides just that. The safe withdrawal rate at the time Shiller offered his prediction was 3.1 percent. That’s probably a better indicator of the value proposition offered by stocks at the time than Shiller’s helpful but flawed prediction. The 3.1 percent number is not so awful as to overstate the dangers of stocks when they are selling at those price levels. But it is low enough given the average long-term return of 6.5 percent to suggest that stocks were a far less appealing option than they are in ordinary circumstances. That simple number told the story better than Shiller’s carefully prepared testimony!
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