Fixed Asset Allocation Has a Problem with Irregular Expenses. Bucketing Fixes it.

FAA does not automatically produce the appropriate asset allocation as a portfolio encounters irregular expenses. Such expenses can change a retiree's risk capacity and, consequently, their risk profile. The allocation should reflect those changes. Unlike bucketing, however, FAA does not automatically incorporate these changes and requires advisor intervention.

Consider a retiree who plans to buy an expensive car every five years. As the portfolio gets closer to the purchase, more money needs to be available in the near term, reducing risk capacity. After the car is purchased, risk capacity rises again.

In theory, the portfolio's allocation should change as liquidity needs change. But advisors often ignore this issue. For retirees who are not substantially overfunded, however, these differences can be meaningful. Their portfolios may need to be reassessed repeatedly as large expenses approach.

That makes the process unnecessarily tedious.

Bucketing handles this problem much more naturally.

In a bucket approach, the safety bucket is determined by a certain number of years of expenses. Suppose the retiree maintains five years of expenses in the safety bucket. The advisor does not need to separately adjust the allocation every time an irregular expense approaches because, if it falls within the next five years, it is automatically included in the safety-bucket amount.

This is one of the things that makes bucketing fundamentally different from FAA.

Bucketing, naturally, caters to the irregular liquidity needs of the retiree, without intervention from the advisor, because the years-of-expenses mechanism automatically takes care of it. FAA, however, does not automatically change the asset allocation of the portfolio just because a large expense is near, but needs the advisor to pick a new asset allocation, and then make the changes to the portfolio.

Bucketing, thus, gives a more accurate picture of the retiree's required asset allocation, with minimal additional effort on the advisor's part.