Fun With Retirement Numbers

This looks a little ominous but is quite interesting. It is a chart made by Crestmont Research, an investment analysis group that writes about, among other investment topics, growth and price/earnings ratios. (The price of a stock divided by the company's earnings per share) They looked at the long cherished American notion of retiring with a fixed amount of money invested in the U.S. stock market and gradually withdrawing 5% a year for thirty years. They placed this notion on a matrix of the behavior of stocks over all the thirty year periods since 1900. What resulted is seriously alarming: The success of such a retirement withdrawal policy varies directly with the P/E ratio when the program is initiated. If the P/E ratio is below 10.4, the withdrawal of 5% ---in this example below the original starting nest egg was one million dollars---would have been successful in 100% of 30 year periods since 1900 and actually would have ended up with a net retained nest egg of almost 7 million dollars. But if the P/E ratio was from 10.4 to 12.0, only 94% of such plans would be successful. If the P/E was greater than 18.7, the success rate of taking five percent out a year was 41%. For all periods the average P/E was 14.4 and the success rate of withdrawal was 75%.

So this seems to be a dangerous plan.

Now here is a chart of the P/E history of the S&P500:

Feel any better?