“What Would Happen If the CAPE Value Fell to 8 (the CAPE Value Usually Drops to 8 at the End of a Long Bull Market) Over the Course of the Next Year and Then Stayed Somewhere in That Neighborhood for 10 Years? If the Portfolio Started at $1 million, the Drop From 30 to 8 Would Subtract Almost $700,000. And Ten Years of $40,000 Withdrawals Would Subtract Another $400,000. That Retirement Is Not ‘100 Percent Safe.'”

Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:

It looks like year 2000 retirees are doing just fine

https://www.bogleheads.org/forum/viewtopic.php?p=7056547#p7056547

I didn’t read the thread. But I agree that, given the CAPE values that we have seen in recent years, Year 2000 retirees who took a 4 percent withdrawal should be doing just fine.

But the question that a safe withdrawal rate study is intended to answer is not “is there a chance that this retirement will do just fine?” It is “will this retirement survive even in a worst-case scenario (the least faovriable returns sequence that we have seen in history but nothing worse than that)? Retirements that began in January 2000 with a 4 percent withdrawal had only a 30 percent chance of surviving for 30 years, according to the historical return data.

You have to take a big hit sometime in the first ten years for the retirement to fail. Otherwise, the portfolio value will have been built up enough that nothing that we have seen in the history of the U.S. market would be enough to bring it down. The Year 2000 retiree took a hit in the 2008 economic crisis. But prices recovered about a year later. So long as prices recover in that amount of time, the retirement is going to be fine.

But what would happen if the CAPE value fell to 8 (the CAPE value usually drops to 8 at the end of a long bull market) over the course of the next year and then stayed somewhere in that neighborhood for 10 years? If the portfolio started at $1 million, the drop from 30 to 8 would subtract almost $700,000. And ten years of $40,000 withdrawals would subtract another $400,000. That retirement is not “100 percent safe.”

Sooner or later, we are going to hit a situation like that. It will be too late for those who suffer failed retirements for us to begin permitting honest posting at thst time. We should have corrected the studies as soon as we learned they were in error. We should set up the studies to do what they purport to do — identify the SAFE withdrawal rate. That number cannot be calculated honestly and accurately without taking the valuation level that applies at the time of the retirement into consideration. The safe withdrawal rate CHANGES with changes in valuation levels.

Rob