Bucket Strategies for Retirement Income

If you read much about investing strategies for producing retirement income, you’ve probably learned something about “bucket strategies.” These are sometimes referred to as “time segmentation” approaches. The general theory is that different groups or “buckets” of investments are set aside to accomplish specific retirement income purposes for different time periods.

Typically, the first bucket uses money market funds and other no-risk investments to provide retirement income for a 3-5 year period. The other buckets are for longer term needs and involve progressively riskier investments.

Robert Powell is a writer at MarketWatch.  He writes great stuff and is very knowledgeable. Recently he taught a retirement planning course at Boston University. Many of his students were experienced financial planners and were users of bucket strategies in their own practices. Powell wrote an article about a group discussion in which his students provided their own thoughts on the uses of these strategies. It is definitely worth reading.

To pique your interest, one student had this to say:

I have reviewed many multiple bucket strategies (time-segmented and goal-segmented) and I believe that the ongoing friction of taxes and transaction costs overwhelm the viability of the strategies.

These concerns make a lot of sense to me.

As part of his concluding remarks, Powell said this:

If you plan on hiring an adviser to build your retirement-income portfolio, you’ll likely get some version of the bucket or time-segmentation approach instead of a new-world retirement-income plan, inclusive of, say, income annuities, deferred annuities, longevity insurance, absolute returns funds, and the like.

I’m sort of with Powell on this with my retirement income planning. It’s a new world and legacy strategies probably won’t work for most of us.

Here is the link to the full article:  Bucket strategies for retirement will stick around


Comments

  1. Bill Marshall says

    We’ve been using a variation of the bucket strategy in our retirement planning — Bucket#1 (aka “safe”) has everything we anticipate needing for inflation-adjusted living expenses through age 105, and Bucket#2 (aka “reckless”) has the excess. Bucket#1 is invested in TIPS (a la Zvi Bodie, and the “Failsafe Retirement Plan”) and Bucket#2 is invested in stocks/commodities/options/futures/hedgefunds/metals/realestate/etcetcetc. While this strategy doesn’t match the traditional buckets for time segmentation, it seems to be the right “new world” adaptation of the traditional strategy.

    While the idea sounds simple, there are complexities. Taxes in particular. The IRAs in Bucket#2 still have RMDs, and the additional tax on the RMD is charged to Bucket#2. Also taxes on dividends on stocks in Bucket#2 are charged to Bucket#2. Simple marginal rate calculations?? Not quite. The additional income can cross thresholds, like causing SocialSecurity to be taxable, or increasing Medicare premiums, or triggering the AMT. Its just the price I pay for having a non-empty Bucket#2.

  2. Fred says

    Bucket plans are based on a fallacy, that the risk of owning volatile securities declines with time. If interested see The Myth of Time Diversification. Paul Samuelson didn’t get the Nobel prize for being a fool. Risk And Uncertainty: A Fallacy Of Large Numbers

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