Can Bucketing Provide More Safety Without Sacrificing Legacy?

A portfolio that starts off conservative does not necessarily have to remain conservative throughout retirement. Bucketing provides a dynamic way to achieve this by systematically reducing the number of years of expenses covered by the safety bucket as retirement progresses. For example, a retiree could reduce the coverage by one or two years every year. The portfolio would gradually become more aggressive, while providing substantially greater protection during the early years of retirement.

The idea itself isn't new. What is less intuitive is how much benefit a retiree can potentially get from reducing conservatism as the years pass.

Consider a retiree with $1.5 million, a 3% initial withdrawal rate, 7% growth returns, 3% safety returns, and 2% inflation. Suppose the retiree starts by keeping enough in the safety bucket to cover 30 years of expenses. This requires approximately 80% of the portfolio to be allocated to the safety bucket at the start of retirement. The coverage then falls by two years each year, with a five-year floor. The portfolio therefore becomes progressively more aggressive over time.

After 30 years, this strategy produces a legacy of approximately $3.19 million.

Now compare this with a constant-bucket approach, where the number of years of expenses covered by the safety bucket does not change. To produce the same $3.19 million legacy under the same assumptions, the retiree would need to start with a safety bucket covering approximately 15.3 years of expenses, corresponding to a starting safety allocation of 43.8%.

That is the interesting part. The declining-bucket strategy starts with 80% in safety, while the constant-bucket strategy starts with only 43.8% in safety—yet both ultimately produce the same legacy. The difference arises because the declining-bucket portfolio becomes progressively more aggressive as the years of protected expenses fall.

This approach could be particularly useful for retirees who want greater protection at the beginning of retirement without permanently sacrificing growth and legacy potential. It could also help bridge the years until Social Security begins or accommodate front-loaded expenses, such as a home purchase.

A practical way to use the approach would be to first determine the constant bucket that makes sense for the retirement plan, and then determine how much additional protection could be provided at the beginning while still ending up with the same legacy. This could be especially beneficial for retirees who are somewhat underfunded and therefore cannot afford to remain too conservative throughout retirement. The initial extra safety can provide the comfort and protection they need, while the gradual reduction in coverage gives them time to prepare for taking on greater investment risk later.