Does the Bucket Approach Really Make a Portfolio More Conservative?

Some people assume that using the bucket approach automatically makes a retirement portfolio more conservative. But is that really true?

Not necessarily.

With the bucket approach, two factors determine how conservative a portfolio is:

1) The number of years of expenses held in the safety bucket. 2) The withdrawal rate.

For example, consider an overfunded retiree with a 2% withdrawal rate. Even with a 10-year safety bucket, the portfolio may still be relatively aggressive because only a small portion of the portfolio is needed to fund 10 years of spending.

Now consider another retiree with a 4% withdrawal rate. The very same 10-year safety bucket could require a much larger allocation to safe assets, resulting in a considerably more conservative portfolio.

In other words, a 10-year safety bucket does not always represent the same level of conservatism. It depends on the withdrawal rate.

This is very different from a traditional fixed asset allocation. A 50/50 portfolio remains a 50/50 portfolio regardless of how much the retiree withdraws each year.

This difference creates a trap that some retirees fall into.

They want to reduce risk, so they simply increase their allocation to debt investments. But if they are already overfunded and have a low withdrawal rate, they may end up holding far more in debt than they actually need. The result is lower long-term growth without a meaningful improvement in retirement security.

For retirees with low withdrawal rates, the bucket approach can be a more efficient way to manage risk. Rather than assigning an arbitrary percentage to debt, it allocates just enough safe assets to fund the desired number of years of future spending, allowing the remainder of the portfolio to stay invested for long-term growth.

CherishBuckets.com helps retirees and financial advisors determine the appropriate bucket strategy based on their portfolio, spending needs, and retirement goals.