Using Trend-Following Managed Futures to Increase Expected Withdrawal Rates

Abstract

Decreased bond yields substantially increase the probability of portfolio depletion for investors using an initial 4% withdrawal rate. One way to increase the safe withdrawal rate of a portfolio is alter the composition of the portfolio without changing the portfolio’s overall risk level. I propose a portfolio construction solution that incorporates trend-following managed futures into portfolios. The resulting portfolio, consisting of 50% stocks, 40% bonds and 10% trend-following managed futures, allows an investor to increase “safe” initial withdrawal rates while still maintaining a similar risk profile to a traditional 50% stock and 50% bond portfolio.

Keywords: retirement, systematic withdrawals, 4% rule, safe withdrawal rates

JEL Classification: C15, D14, G10, G11, G17