Instead, we allow Buckets #1 and #2 to slowly drain, while we hope for a stock market recovery. Believing that the bucket strategy can insulate us from short-term market fluctuations, we don't transfer assets out of Bucket #3. Let's imagine that stocks are down for the year. The result is that we are effectively spending money each year out of the very Bucket (#3) that is suppose to be used seven or more years down the road. In addition, if bucket #2 had gone down in value, we would need to top it off from bucket #3 as well.Īll we've really done is take assets from Bucket #3 (stocks) and moved them to Bucket #1 (cash) and maybe Bucket #2 (fixed-income). Unless fixed-income had a banner year, however, most would come from bucket #3. Some of this might come from bucket #2, if our fixed income investments had gone up in value. One approach would be to refill the cash bucket. A year later it's down to just one year of expenses, Bucket #2 has more or less than five years of expenses, depending on performance and inflation, and Bucket #3 has gone up or down based on market performance. As we begin retirement, we have two years worth of expenses in Bucket #1. Let's assume we use the 3 bucket strategy described above. Notwithstanding its initial appeal, there are both theoretical and practical problems with the Bucket Strategy. Why the Bucket Strategy is Flawedįirst impressions can be deceiving. Third, it's easy to understand, an important criteria for retirees who, unlike me, don't spend their time reading white papers on the 4% Rule. Second, it isolates risky investments like stocks into a bucket that won't be touched for many years.
Even if stocks drop precipitously, the retiree is protected with two years of cash and another five years of relatively safe bonds. First, it appears to insulate a retiree from short-term market fluctuations. This strategy has an initial appeal for several reasons. (Note: The number of years worth of expenses in buckets one and two above can be adjusted to meet a retiree's specific risk tolerance.)