DISCUSSION PAPER PI-1405
Can sustainable withdrawal rates be enhanced by trend following?
Andrew Clare, James Seaton, Peter N. Smith, and Stephen Thomas
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.