Can Sustainable Withdrawal Rates be Enhanced by Trend Following?

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. 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.