Scenario Analysis: Finding Your Ideal Mix of Safety and Growth in Retirement

CherishBuckets.com can help you perform scenario analysis on the bucket approach. The table below shows a retiree with $1.8 million who is trying to determine the right number of years of expenses to keep in the safety bucket, while also evaluating the impact of increasing equity returns.

For example, increasing the equity return assumption by just 1% (from 6% to 7%) allows this retiree to move from covering 6 years of expenses to covering 14 years of expenses. This type of analysis helps retirees understand the trade-off between taking more equity risk and maintaining a larger safety cushion, allowing them to choose the combination that best fits their preferences.

The second lesson from this table is that as we move higher on the years-of-expenses ladder, equity returns become less influential.

Consider a retiree choosing only 3 years of expenses. At this level, the required lump sum with a 6% equity return can be almost 50% higher than the lump sum required with a 9% equity return. However, this difference shrinks significantly as the safety bucket grows. For instance, at 30 years of expenses, the difference between the two scenarios is only 16%.

The reason is that, at very high safety-bucket levels, only a small portion of the portfolio remains invested in equities. Since equity exposure is limited, higher equity returns have a much smaller impact on the overall portfolio outcome. The initial lump sum remains high even when assuming a 9% equity return.

Scenario analysis helps retirees visualize these trade-offs and identify the right balance between safety, equity exposure, and legacy goals.