If you’re retired or nearing it, by definition you’re in the retirement risk zone. After half a lifetime or so of prudent saving and investing, you’re now living in part on your accumulated capital and with luck some pensions and/or annuities provided by some combination of the government and past employers.
While it’s nice to have some kind of retirement nest egg, the chances of a major stock market correction are an ever-present source of anxiety for many retirees, myself included. Sure, proper diversification and asset allocation should allow you to Stay Calm, which happens to be the title of a new book published in September by David Booth. He’s the founder of Dimensional Fund Advisors (DFA), one of the better indexing companies out there.
I’ll refer you to a couple of blogs from my site that can add insight to the topic of retirement anxiety and overvalued stock markets. One is on the 4% rule, a topic we have explored in this very column as recently as late 2025 (here). The other is on Robert Shiller’s CAPE ratio, the Cyclically Adjusted Price-to-Earnings ratio (CAPE), which is a measure of how fairly valued or overvalued stocks may be. As I write this, U.S. stocks are considered to be on the expensive side even as the usual September swoon appears to be under way.
My blog on the 4% rule appeared late in July. The blog on the CAPE ratio ran late in August. Each contains full quotes from a variety of business owners and investment professionals on both sides of the border, gathered on LinkedIn and a service called Connectively, formerly Featured.com. These typically run a few thousand words, which is more than we normally allocate space for in Retired Money.
Here I can touch only on the highlights from the most insightful of the sources. Obviously, those interested can read the whole blogs at their leisure. They are lightly edited and I added sub-headings that should help get you to the content of interest to you, with the quotes I found most useful running closer to the beginning of each blog.
Here’s a useful primer on the CAPE Ratio, provided by blogger Michael J. Wiener, on his Michael James on Money blog (from early August). He says the CAPE ratio is “just the current price divided by the average inflation-adjusted earnings over the past decade.” Investopedia defines the CAPE ratio as “a valuation measure that uses real earnings per share over a 10-year period to smooth out fluctuations in corporate profits.” When Wiener wrote the blog early in August, the U.S. market-wide CAPE was about 41.
Don’t rely on the CAPE ratio to time the market
I led off my CAPE blog with the following insight from Mintwit founder Scott Brown. He cautioned against relying on the CAPE ratio to time the market: “U.S. stock valuations have been quite elevated from their historic average for some time now, but the readers who kept hoping for the CAPE to normalize before buying have basically missed an entire decade of gains, which makes me very skeptical of relying solely on CAPE ratios to time the market.”
Younger investors can simply dollar-cost average and remain invested while accumulating wealth. Those already retired, or five to 10 years from it, “would be wise to reassess the allocations, have enough cash to survive at least one or two years without investing anything, and maybe increase the allocation in non-U.S. markets, as they currently trade at relatively more attractive multiples (Canada and Europe).”
As for the 4% rule, you’ll see the two topics are intricately connected. Of all the retirement rules of thumb discussed over the decades I’ve spent writing about investing and retirement, few are more ubiquitous than financial planner William Bengen’s famous 4% rule. Four per cent is of course Bengen’s rough estimate of the annual percentage of a portfolio that can safely be withdrawn each year without causing your retirement nest egg to run out of money in old age, adjusted for inflation. (It’s also roughly the basis for mandatory withdrawals from registered retirement income funds in Canada, at least in the early years of the withdrawal schedule. It reaches 20% a year by your 90s.)
While Bengen has more recently updated his 4% figure to a slightly higher 4.7%, the “rule” continues to fascinate and sometimes provoke financial advisors, retirement gurus and media pundits. Indeed, back in July, in the Motley Fool Hidden Gems Investing podcast, regular TMF Retirement contributor Robert Brokamp rebroadcast an earlier interview with Bengen, titled “The father of the 4% rule says retirees can take out much more.”
The 4% rule is a useful mental anchor but just a starting point
The blog based on Connectively gathers responses on the 4% rule from more than 15 experts. The gist of the input is that the “rule” should be considered more a starting point than a finishing line. As Runbo Li of Magic Hour AI put it, it’s a “useful mental anchor but don’t treat it as gospel.” That’s because “the world it modeled—steady bond yields, predictable inflation corridors, a relatively stable geopolitical backdrop—doesn’t fully exist anymore.” In fact, the aforementioned Scott Brown suggested Gen Z and Millennials can “ignore it completely because they are decades away, and they have much better control over income right now through negotiation or side work such as surveys and focus groups than by worrying about a withdrawal rate that is years away from being used.”
See also a subsequent Findependence Hub blog by Stefano Starkel titled the “The alternative to the 4% rule isn’t a different number: It’s a different mechanism.” There, Starkel argues that “the fragile part of a fixed-withdrawal plan is sequence-of-returns risk.” He shows a chart that demonstrates how early losses in retirement can have a dramatically negative impact on returns and thus retirement income.
If you have a financial advisor, you may well want to ask him or her about these concepts and how they may affect your retirement plans. As I see it, they all tie in to risk management and asset allocation/diversification. If you’re properly diversified and grounded in these concepts, then you should be able to Stay Calm, as Booth’s book so eloquently reminds us. We’ll look at that book in depth next time.
Read more Retired Money columns by Jonathan Chevreau:
- The Wealthy Barber retires
- AI for conservative investors
- Online “finfluencers” grow up
- Is AI the ultimate retirement hack?
The post The CAPE ratio, the 4% rule, and retirement anxiety appeared first on MoneySense.
