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The Buckets Strategy

My last post discussed why it is a good idea for most retirees or near-retirees to set up an income ladder to fund the first years of retirement. However, this income ladder is only the first step in an overall retirement income withdrawal strategy. Today I will discuss one particular strategy that is fast becoming the basis for the approach used by most financial advisors. This approach is called the “Buckets strategy.”

The buckets strategy is an asset allocation approach that supports safe income withdrawal for individuals who are retired or approaching retirement. The buckets strategy was popularized by a financial planner named Raymond J. Lucia, Sr. CFP located in San Diego, CA. Ray’s firm now has offices in several cities around the US.

The concept of the buckets strategy is to properly match asset types to liabilities. The strategy uses safe, stable and sometimes guaranteed investments to draw income in the early retirement years in order to allow time for the more risky investments in the portfolio to grow. More simply, the retiree would withdraw fixed income assets in their early retirement years and withdraw from equity type growth assets in the latter part of their retirement.

The buckets strategy generally consists of three different buckets. The table below summarizes the characteristics of each bucket.

The three buckets are set up to have safe investments in buckets #1 and #2 and more risky assets in bucket #3. While the retiree spends down the assets in the first two buckets, he does not touch the third bucket (except for any income that may be generated). The strategy is designed for the first and second buckets to provide at least 15 years of living expenses so the risky equity assets have time to grow to a size large enough to provide income for the latter part of a retiree’s retirement life.

In designing a retirement withdrawal strategy, there is no limit to the number of buckets one can use or the number of years each bucket must supply income. I have known people who set up bucket strategies that are composed of four and five buckets. In my previous post I mentioned my 10-year income ladder which is our safe money bucket. The reason for variations is when designing a retirement income strategy for a specific person; assumptions need to be made regarding the retiree’s expected life expectancy, risk tolerance, total return, and inflation. Additionally, considerations need to be made for retirees who may have an employer provided pension or own some other annuity product.

Because of all these variables, I would recommend that you read one of Ray Lucia’s books on the subject. Ray Lucia has written three books on how to implement his buckets strategy. I have read all three, but I think his first book titled Buckets of Money: How to Retire in Comfort and Safety is really the best for explaining how to implement his buckets strategy. Before deciding on a retirement withdrawal strategy, I would advise seeking the advice of a financial planner.

In the next few posts I will discuss some other concepts that relate to retirement income withdrawal strategies, such as how to possibly increase the 4% Safe Withdrawal Rate (SWR), ways to reduce risk when making portfolio withdrawals, and other ideas.

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