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

Research output: Working paperDiscussion paper

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Publication details

DatePublished - 3 Jul 2017
PublisherDepartment of Economics and Related Studies, University of York
Number of pages36
Original languageEnglish

Publication series

NameDiscussion Papers in Economics
PublisherDepartment of Economics, University of York
No.17/06

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.

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