Can sustainable withdrawal rates be enhanced by trend following?

Andrew D. Clare, James Seaton, Peter Smith and Stephen H. Thomas

International Journal of Finance & Economics, 2021, vol. 26, issue 1, 27-41

Abstract: We examine the consequences of alternative popular investment strategies for the decumulation of fundsinvested 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. 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.Second, 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. To anticipate our empirical findings, we find two powerful conclusions: Smoothing the returns on individual assets by simple trend following techniques (or similar) is a potent tool to enhance withdrawal rates. Although diversification across asset classes does lead to higher withdrawal rates than simple equity/bond portfolios, “smoothing” returns is a far more powerful tool for raising withdrawal rates; in fact, smoothing the popular equity/bond portfolios (such as the 60/40 portfolio) is an excellent and simple solution to constructing a retirement portfolio.

Date: 2021
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