All Things William P Bengen and his New 4.7% Rule

I am reading another book (of course I am) that was recommended by Mr. B called "Beyond the 4% Rule" by Abraham Okusanya 2018. So it was written after Mr. B's 2016 update but before his 2025 book. Mr. Okusanya is the Mr. B of the UK as most of his data concerns the UK. Anyway, he states "The Data available on UK equity valuations is somewhat limited, going back to 1926 for PE ratio and 1935 for Shiller PE10 (CAPE ratio). The data shows clearly that there is an inverse relationship between the PE ratio in a given year and the annualized real return on equities over the subsequent 10 years. However, we should be extremely cautious if we use current equity valuations to predict future equity returns, in the medium to long term." He bases this on the R squared between current PE ratio and subsequent 10 years' real return on UK equities is 20% and 22.5% on CAPE. Meaning the predictability of future return (in the UK anyway) using current PE or CAPE is lower than the flip of a coin.

@pizzaman Have you experimented with Pralana's CAPE-based withdrawal system? It is based on a "best fit" line between cape and withdrawal, where the user sets the slope and intercept. (I use 1.75 and 0.5.) For reasons unknown to me, Pralana only allows us to use it with historical runs. But it seems potentially even more valuable looking forward ten years, for withdrawals and monte carlos.

@jkandell I am still using Gold 2025 so I have not used Pralana's CAPE-based withdrawal system. Be careful just using CAPE to determine safe withdraw rates (SWR). Inflation tided with CAPE is more predictive. CAPE hit 32.6% in 1929 which predicted the bear market of 1929-1932. However, even though the stock market dropped by almost 90%, the SAFEMAX for that era was 5.8% because of the deflationary backdrop of the period.

Ern’s safemax for 1929 peak was 4.79%. But if you augment with his “drop from peak”, he would have had you withdraw more each month as the stock market crash grew month by month till June 1932 (79% real drawdown) when he would have said to withdraw 5.26%. So ending up with similar result? But in the real world, I doubt if I’d been there I’d have the trust nor stomach to follow either author and raise my withdrawal rate during 1929-32!

Interesting. "...till June 1932 (79% real drawdown) when he would have said to withdraw 5.26%". Did Ern use inflation coupled with CAPE to get to the 5.26%? If he did not use inflation, then you could say that today, with CAPE greater than 30, your safe withdraw rate would also be about 5.26%?

ERN only uses inflation-adjusted figures for everything.

With the advantage of hindsight, the SWRs (in real dollars) for each 30 year cohorts 1929-32 turned out to have been as follows (with my approximation of Bengen's 11/11/11/11/40/5 portfolio in ERN's spreadsheet). It ranged from almost 5% to about 11% in retrospect. But who knew that at time in the depths of despair that swr would have been so high? (The worst years were of course the late 1960s cohorts, but who knew that either at the time?)

Now thinking about how someone with SAFEmax and a cape-adjusted model would have reacted.... ERN uses a formula 0.5%*1/cape + 1.75%. (Pralana has a version of this equation you can use on the historical simulation page.)

If folks back then had been using a Cape-adjusted withdrawal rate, ERN in theory would have recommended the following SWRs for each monthly 30 cohort.

It looks like, because of high-cape, it would have started around 3.5% and gown down a little as CAPE peaked, but then come back up as CAPE dropped.

All this is hypothetical of course, since the 11/11/11/11 was not really able to be invested, and SAFEmax was taking into account the history that came after.

I don't think ERN would say you actually would use these exact numbers; I think he goes on to smooth them to 12 month averages. He was just testing his CAPE: SWR equation (similar to what Bengen does with his best fit line).