Can Sustainable Withdrawal Rates Be Enhanced by Trend Following?

34 Pages Posted: 17 Aug 2017 Last revised: 26 Mar 2018

See all articles by Andrew Clare

Andrew Clare

City University London - Sir John Cass Business School

James Seaton

City University London - Sir John Cass Business School

Peter N. Smith

University of York - Department of Economics and Related Studies; Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA)

Steve Thomas

City University London - Sir John Cass Business School

Date Written: July 25, 2017

Abstract

We examine the consequences of alternative popular investment strategies for the decumulation of funds invested for retirement through a defined contribution pension scheme. We examine in detail the viability of specific ‘safe’ withdrawal rates including the ‘4%-rule’ of Bengen (1994). We find two powerful conclusions; first that smoothing the returns on individual assets by simple trend following techniques is a potent tool to enhance withdrawal rates. Secondly, we show that while diversification across asset classes does lead to higher withdrawal rates than simple equity/bond portfolios, ’smoothing’ returns in itself is far more powerful a tool for raising withdrawal rates. in fact, smoothing the popular equity/bond portfolios (such as the 60/40 portfolio) is in itself an excellent and simple solution to constructing a retirement portfolio. Alternatively, trend following enables portfolios to contain more risky assets, and the greater upside they offer, for the same level of overall risk compared to standard portfolios.

Keywords: Sequence Risk, Perfect Withdrawal Rate, Decumulation, Trend Following

JEL Classification: G10, G11, G22

Suggested Citation

Clare, Andrew D. and Seaton, James and Smith, Peter N. and Thomas, Stephen H., Can Sustainable Withdrawal Rates Be Enhanced by Trend Following? (July 25, 2017). Available at SSRN: https://ssrn.com/abstract=3019089 or http://dx.doi.org/10.2139/ssrn.3019089

Andrew D. Clare

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

James Seaton

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Peter N. Smith (Contact Author)

University of York - Department of Economics and Related Studies ( email )

Heslington
York 010 5DD
United Kingdom
+44 1904 433 765 (Phone)
+44 1904 433 759 (Fax)

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA) ( email )

ANU College of Business and Economics
Canberra, Australian Capital Territory 0200
Australia

Stephen H. Thomas

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 (0) 20 7040 5271 (Phone)
+44 (0) 20 7040 8881 (Fax)

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