Bucketing: A More Flexible Way to Protect Retirement Spending and Target Legacy

Retirees who want to protect essential expenses while also preserving a meaningful legacy have several ways to structure their portfolios. Three approaches stand out: floor-and-upside, bucketing, and fixed allocation.

With a floor-and-upside strategy, the retiree first secures essential expenses for the entire retirement period. TIPS can be used to create this floor, while the remaining portfolio is invested more aggressively to fund discretionary spending and potentially create a legacy.

The advantage is clarity: essential expenses are protected upfront. The drawback is that creating a floor for the entire retirement can require a substantial initial allocation, leaving less capital available for growth.

Bucketing offers a more flexible approach.

Instead of funding essential expenses for the entire retirement period, the retiree can choose how many years of expenses should be protected in the Safety Bucket. The portfolio can then be structured to provide periodic refills to that bucket.

The Income Bucket holds the assets intended to fund those future refills. Importantly, "income" does not necessarily mean bonds. It could contain a significant allocation to equities, with the objective of generating the growth needed to replenish the Safety Bucket over time.

Whatever remains after funding the Safety Bucket and the assets needed for future refills can go into the Growth Bucket. This capital can support discretionary spending and legacy.

The Growth Bucket should feel relatively unencumbered. The assumption is that the equities in the Income Bucket have sufficient time to recover from market declines before the Safety Bucket is exhausted, allowing refills without having to sell the Growth Bucket during a downturn.

A traditional fixed-allocation portfolio makes legacy earmarking considerably harder.

Because the portfolio is continuously rebalanced between equities and bonds, the amount intended to provide safety—and the amount intended for legacy—can change with market movements. A significant market decline, for example, can trigger rebalancing from bonds into equities, reducing the assets that were previously providing the safety component.

Fixed allocation is fundamentally designed to benefit from mean reversion, rather than to maintain explicit safety and legacy earmarks.

Of the three approaches, bucketing arguably provides the greatest flexibility. The retiree and advisor can choose the desired number of years of protection and, in turn, determine how much capital can remain available for growth and legacy.

CherishBuckets.com lets advisors evaluate different bucket strategies and determine which approach best suits a client's objectives.