Bucketing Can Make Risk Profiling More Grounded

Bucketing uses risk profiling in much the same way as fixed asset allocation does. A questionnaire can help determine how much risk a client is comfortable taking. But bucketing offers a more grounded way to express that risk profile.

Instead of forcing a retiree to maintain a certain percentage in debt, bucketing can define risk in terms of how many years of expenses should remain protected.

That becomes particularly interesting when annual expenses are irregular—or even negative because of inflows.

If a retiree has several years with unusually low expenses or net inflows, bucketing can recognize that variation instead of treating every year identically. The Safety Bucket could be sized around the years that actually require protection, potentially allowing more assets to remain invested for growth.

Of course, some retirees may find that approach too aggressive. They may prefer greater consistency. Bucketing can accommodate that too.

For example, negative expense years could be replaced with an arbitrary positive amount for bucket-sizing purposes. The actual spending projection remains unchanged, but the portfolio is given a larger safety requirement.

There is another way to tune the approach: increase the expense amounts used to size the Safety Bucket—perhaps by 50% or 100%—without increasing actual spending. This could be particularly useful during the early retirement years, when sequence-of-returns risk is greatest.

The resulting asset allocation changes naturally. Rather than deciding that a retiree should move from 60/40 to 50/50 for five years, the advisor can increase the amount of future spending that must be protected and let the bucket structure determine the allocation.

That is one of bucketing's advantages: it can tune portfolio risk through the retiree's actual cash flows, potentially improving both safety and growth without relying entirely on arbitrary allocation percentages.