The Money Muse

When most people think about retirement withdrawals, they picture something simple and fixed—like the classic 4% rule. Take out 4% in the first year, adjust for inflation every year after, and you’re all set… in theory.

But real life—and real markets—rarely move in straight lines.

That’s where the CAPE-based dynamic withdrawal strategy comes in. It’s a more flexible approach that adjusts withdrawals based on stock market valuations, helping retirees (and early retirees) balance spending needs with long-term portfolio sustainability.

If your goal is to live off your investments for 30, 40, or even 50 years, understanding how this strategy works can give you more confidence and control in retirement planning.

First, What Is CAPE?

CAPE stands for Cyclically Adjusted Price-to-Earnings ratio, also known as the Shiller P/E Ratio, created by economist Robert Shiller.

It measures:

• The current price of the stock market
  divided by
• The average inflation-adjusted earnings of the past 10 years.

Why bother with 10 years of earnings? Because it smooths out short-term noise—booms, busts, recessions—giving a more reliable picture of whether the market is expensive, fairly valued, or cheap.

Historically:

• High CAPE = expensive market = lower future returns
• Low CAPE = cheap market = higher future returns

This relationship is why CAPE can be useful in planning withdrawals.

How the CAPE-Based Dynamic Withdrawal Strategy Works

Instead of withdrawing a fixed percentage every year, a CAPE-based strategy adjusts how much you withdraw based on market valuation.

The general idea:

• When the CAPE ratio is high (stocks are expensive), you withdraw less.
• When the CAPE ratio is low (stocks are cheap), you withdraw more.

The goal isn’t to time the market. It’s to respond to market conditions so your portfolio lasts longer.

Why it works:

When markets are overpriced, expected returns tend to be lower. Reducing withdrawals in these periods helps preserve your savings during times when your portfolio is more vulnerable.

When markets are underpriced, expected returns tend to be higher. Increasing withdrawals during these periods means you can enjoy more income when your portfolio is better positioned to replenish itself.

A Simple Example

Different financial researchers have proposed different formulas, but a simplified version looks like this:

• Base withdrawal rate = 5%
• Adjustment factor depends on CAPE

For example:

• If CAPE is above 30 (very high), you might withdraw 3.5%-4%
• If CAPE is around 20 (average), you withdraw about 5%
• If CAPE is below 15 (cheap), you might allow 6%-7%

No rigid rules—but the principle stays the same: Withdraw less when stocks are expensive, more when stocks are cheap.

Why the CAPE Strategy Appeals to Long-Term Retirees

If you’re planning for a retirement that could last decades, one of the biggest risks you face is sequence of returns risk—poor market returns in the early years of retirement that permanently damage your portfolio.

CAPE-based withdrawals help reduce that risk by naturally tightening spending in overpriced markets, which are historically tied to lower future returns.

This makes the strategy especially appealing for people:

• retiring early
• planning long retirements
• living off investment-heavy portfolios
• wanting a data-backed alternative to rigid rules

Pros and Cons

✔ Pros

• More responsive to real market conditions
• Can extend portfolio longevity
• Reduces sequence-of-returns risk
• Allows higher withdrawals when markets are favorable

✘ Cons

• Requires monitoring CAPE (not difficult, but not autopilot)
• Withdrawals fluctuate—may not work for people needing fixed income
• No guarantees (like any retirement spending strategy)

Is the CAPE Strategy Right for You?

If you want a withdrawal plan that adapts with market conditions—and you’re comfortable adjusting your spending year to year—the CAPE-based dynamic withdrawal strategy can be a powerful tool.

It blends the reliability of decades of valuation data with the flexibility needed for long-term financial planning.

And while no withdrawal strategy is perfect, CAPE-based methods offer something the 4% rule never could: A way to adjust gracefully as the market evolves.