How the Bucket Approach Naturally Adapts to Overfunded and Underfunded Retirees

One of the most interesting characteristics of the bucket approach is that it naturally adapts to whether a retiree is overfunded or underfunded.

For retirees who are overfunded, the bucket approach often results in the portfolio becoming less conservative as retirement progresses.

Why?

As the portfolio grows, it often increases faster than annual expenses. As a result, the future expenses held in the safety bucket become a smaller and smaller fraction of the overall portfolio. This naturally causes the allocation to safe assets to decline over time, allowing a larger portion of the portfolio to remain invested for long-term growth.

Now consider an underfunded retiree.

As retirement progresses, the portfolio may not keep pace with spending. Future expenses therefore become a larger fraction of the remaining portfolio, causing the allocation to the safety bucket to increase. In other words, the portfolio naturally becomes more conservative as retirement progresses.

What's interesting is that these changes occur automatically as a result of the mathematics behind the bucket approach. The strategy adjusts itself based on the retiree's financial position rather than following a predetermined glide path.

With a traditional fixed asset allocation, similar changes would typically require periodic reviews and adjustments, often in consultation with a financial advisor.

For retirees who prefer a do-it-yourself approach, this makes the bucket strategy particularly appealing. It naturally adapts as retirement unfolds, helping the portfolio reflect the retiree's changing financial circumstances.

CherishBuckets.com makes it easy to explore these scenarios using your own retirement assumptions. Try different portfolios, spending levels, and retirement goals to see how the bucket allocation evolves over time.