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How Shiller's PE10 predicts retirement outcomes — and how to use it
The 4% rule was built on historical average returns. But history shows a pattern: retire when markets are cheap and your odds improve dramatically. Retire at a market peak — like 2000 or 1929 — and even a 3.5% withdrawal rate runs into serious trouble. Robert Shiller's CAPE ratio (cyclically adjusted price-to-earnings, also called PE10) is the best single metric for knowing whether you're retiring into a cheap or expensive market.
It's not a crystal ball. But it's actionable — and using it can meaningfully improve your retirement odds without requiring you to time the market or predict the future.
The standard P/E ratio divides stock price by the last 12 months of earnings. The problem: earnings are volatile. A single bad year (recession, write-downs, pandemic) can make P/E look cheap when the market is actually expensive, and a great year can make it look expensive when it's actually cheap.
CAPE solves this by dividing price by the average of the last 10 years of inflation-adjusted earnings. Ten years of averaging smooths out economic cycles, recessions, and one-time events to give you a stable, long-run view of whether stocks are cheap or expensive relative to their productive capacity.
A brief history
Decades of research confirm that starting CAPE is strongly predictive of 10-year forward real equity returns. This doesn't tell you what the market will do next year — but it does give you a reasonable probability range for what the next decade might look like:
| CAPE | Market condition | Historical 10-yr real return | Safe withdrawal rate |
|---|---|---|---|
| < 10 | Very cheap | ~10–15% real | ~5.5% |
| 10–15 | Cheap | ~8–12% real | ~4.5–5% |
| 15–20 | Fair value | ~5–9% real | ~4.0–4.5% |
| 20–25 | Elevated | ~3–7% real | ~3.5–4.0% |
| 25–30 | Expensive | ~1–4% real | ~3.25–3.5% |
| > 30← ~now | Very expensive | ~–1 to 3% real | ~2.5–3.25% |
Safe withdrawal rates from research by Michael Kitces and Wade Pfau correlating starting CAPE with 30-year historical outcomes. Higher CAPE at retirement correlates with worse sequence-of-returns risk in the early years.
Calcifer implements a CAPE-dynamic withdrawal strategy using the formula:
Where a is an intercept (default ~0.01) and b is a coefficient (default ~0.5). This is inspired by Big ERN's Safe Withdrawal Rate series, which demonstrated that CAPE is the strongest single predictor of retirement cohort outcomes.
When CAPE is high (expensive market)
1/CAPE is small, so the formula yields a lower withdrawal rate. You spend less in years when valuations are stretched and sequence-of-returns risk is highest. At CAPE 35, the default formula gives a rate of about 2.4%.
When CAPE is low (cheap market)
1/CAPE is larger, so the formula yields a higher withdrawal rate. You can spend more when stocks are cheap and expected returns are higher. At CAPE 10, the default formula gives a rate of about 6%.
This is a dynamic rule — it recalculates every year
Unlike the fixed 4% rule which locks in year-one spending and inflation-adjusts it forever, CAPE-dynamic withdrawals are recalculated annually based on the current CAPE reading. In a bear market that brings CAPE down, your allowed withdrawal rate actually increases.
The Can I Retire page in Calcifer lets you tune the a and b parameters directly and see how they affect your historical backtest outcomes.
The chart below shows the CAPE-implied withdrawal rate at each CAPE level (using the default formula) against the static 4% rule. At expensive markets, the CAPE rate is more conservative. At cheap markets, it permits more spending.
Formula: withdrawal_rate = 0.01 + 0.5 × (1 / CAPE). At CAPE 10, rate ≈ 6.0%. At CAPE 20, rate ≈ 3.5%. At CAPE 35, rate ≈ 2.4%. The intersection point (where CAPE-adjusted equals 4%) occurs around CAPE 16-17, historically close to fair value.
CAPE has been structurally elevated since the 1990s
Accounting rule changes (FASB), the rise of intangible-heavy tech companies, and global earnings diversification may justify a higher long-run average CAPE than pre-1990 history suggests. Simply comparing today's CAPE to 1880s norms may not be apples-to-apples. Some researchers argue the fair-value CAPE is now closer to 25 than 15.
CAPE predicts 10-year returns, not timing
A high CAPE can persist for a decade — the US CAPE was elevated throughout the 1990s bull market. Don't treat CAPE as a market-timing signal. It's a long-range probability instrument. You can't use it to know when to get in or out.
International diversification helps
CAPE varies enormously across countries. In 2025, the US CAPE sits around 33, while European and emerging market CAPEs are far lower (often 10–20). Global diversification gives you exposure to cheaper markets that the CAPE metric says should have better expected returns.
It's one signal, not an oracle
CAPE has been one of the best single predictors of 10-year equity returns in academic research. But it explains only a portion of the variance in actual outcomes. Use it as an input to withdrawal planning, not as a definitive forecast. Combine it with Guyton-Klinger guardrails or a cash buffer strategy for a more robust system.