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Should You Adjust Your Retirement Plans for an Expensive Stock Market? 

The US stock market is trading at some of the highest valuation levels in history. In this post, we’ll explore whether you should update or adjust your retirement planning to account for these extreme valuations. 

The following chart from Advisor Perspectives averages 4 different valuation indicators to show how expensive or cheap the US stock market has traded. As the chart shows, we’re currently trading near the all-time high average valuation level: 

While valuation levels tell us little about what will happen in the short run, they have been strongly correlated with future stock market returns. Historically, high stock market valuations have led to lower returns over the following decade. The following chart from Crestmont research shows the relationship between stock market valuation (orange line) and future ten-year returns (green bars):

As expected, when the orange line is low (valuations are cheap), the green bars are high ( future returns are high). When the orange line is high (valuations are expensive), the green bars are low or even sometimes negative (future returns are poor). Based on the current valuations investors should prepare themselves for low single-digit returns in US equities over the next ten years, with negative returns a real possibility! 

Given the extreme overvaluation of the stock market, I think this is a time when you absolutely should factor these valuation levels into your retirement planning. 

How Can you Adapt your Plan to Expensive Valuations? 

Dynamic/Tactical Asset Allocation

I think it makes sense for those with the knowledge and experience to adjust their investing portfolios to the risks and opportunities the market is presenting. with US equity valuations at such extremes, the portfolios I manage are drastically underweight equities in general in favor of short-term government bonds and international equities. With the yield on treasuries up so much in the past few years, patient investors are now reasonably compensated as they await better future opportunities.

Change Retirement Plan Assumptions

Most retirement planning software utilizes historical data that does not take into account current valuations. While the Monte Carlo simulations include some bearish data it is certainly not the base case. I prefer lowering the assumed US equity return projections, at least for the next decade, to better reflect historical returns from these valuation levels.

Bill Bengan famously came up with the 4% retirement withdrawal strategy in 1994. The 4% rule states that you can withdraw 4% of your portfolio value in the first year of retirement, and then adjust that amount for inflation every year. Based on historical data, such an approach worked over every 30-year period historically. Some have updated that work with more aggressive withdrawal numbers, as improved asset allocation, more benign inflation, and strong stock returns will support higher withdrawal rates. Bengan himself updated his findings on a safe withdrawal rate to 4.7-4.8%. 

Given the current stock market, I think the safe withdrawal rate should be revisited. I recommend targeting a 4% or lower withdrawal rate given the poor starting valuation levels today. It’s much easier to increase future spending than it is to lower it! 

Morningstar has attempted to update safe withdrawal rates each of the past few years utilizing its forecasts of future return for major asset classes. In 2021 they forecasted a safe withdrawal rate of only 3.3%. That was based on historically low bond yields combined with expensive stock market valuations. In their most recent update in 2023, Morningstar updated the safe withdrawal rate to 4%, primarily driven by increased bond yields (although equity valuations were down at that point vs 2021). I suspect their next update will put the safe withdrawal rate at a similar amount or slightly lower given that valuations have continued to rise and bond yields have not changed significantly. 

Of course, by utilizing more conservative retirement planning assumptions many will likely find that they will need to save more, work longer, or spend less to achieve their retirement goals. 


As we stand at the crossroads of historically high market valuations, I believe a strategic reassessment of your retirement plan is prudent. Adjusting your investment portfolios through dynamic asset allocation or recalibrating your retirement plan assumptions are critical steps in safeguarding your future. By adopting a more conservative stance on withdrawal rates, we can create a buffer against market volatility and the potential for lower-than-expected returns.

In the end, the goal is not merely to survive the market’s ebbs and flows but to thrive within them. By preparing for a range of outcomes, you can ensure that your retirement plan remains robust, resilient, and responsive to the times.

If you want to discuss your retirement plan or financial situation, schedule a free consultation and find out how Sophos Wealth Management can help you. 

Scott Caufield, CFA, CPA