Decumulation, Sequencing Risk and the Safe Withdrawal Rate: Why the 4% Withdrawal Rule leaves Money on the Table

Andrew Clare, James Seaton, Peter Smith and Stephen Thomas

Discussion Papers from Department of Economics, University of York

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. (search for similar items in EconPapers)
JEL-codes: G10 G11 G22 (search for similar items in EconPapers)
Date: 2017-07
New Economics Papers: this item is included in nep-age and nep-rmg
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