Why I Hate the "Bucket Strategy"

If you read almost any modern personal finance book, you will eventually stumble across the exact same advice for managing your money in retirement: use a “bucket” strategy.

The strategy is designed to protect you from sequence of returns risk—the very real danger of experiencing a market crash during your first few years of retirement, which can decimate your portfolio before it has a chance to compound.

To prevent this, the bucket strategy divides your assets into three distinct categories:

• A long-term bucket: Exclusively for equities.

• An intermediate bucket: Filled with bonds, CDs, and treasuries.

• An immediate bucket: Kept in cash to fund your day-to-day lifestyle for the next year or two.

It sounds incredibly smart in theory. But I have a confession to make: I hate buckets.

Here is exactly why I think this popular strategy is flawed, and the experimental, radically simplified approach I plan to use for my own decumulation phase instead.

1. It discounts the equity premium Over long periods of time, equities simply perform better than almost everything else. In fact, studies show that an all-equity portfolio in retirement regularly outperforms almost every other asset allocation over the long haul. When you take a massive chunk of your portfolio out of equities just to fill your cash and intermediate buckets, you are actively choosing to accept lower returns.

2. It is dangerously conservative In the Financial Independence community, we already start with highly conservative assumptions. The standard 4% safe withdrawal rule already accounts for some of the worst sequence of returns scenarios in modern history. When you force a bucket strategy on top of the 4% rule, you are layering a conservative strategy over an already conservative baseline. This guarantees you will have less money to spend. If you want to protect yourself, you are much better off using a 5% withdrawal rate and implementing simple guardrails—like deciding to skip an inflation adjustment or cutting your spending by 10% during a down market year.

3. It is a logistical nightmare Bucketing sounds incredibly simple until you actually have to manage it. You are constantly forced to calculate exactly how and when to move money from the high-risk bucket down to the intermediate and low-risk buckets. It introduces massive decision fatigue. There are so many moving parts that most people end up hiring a financial advisor just to execute the strategy properly. Worse, the complexity creates a high likelihood that you will eventually lose your courage, panic during a downturn, and abandon your own plan.

I want to avoid the decision fatigue of buckets entirely. While I haven’t back-tested this with historical data yet, I have been working on an experimental strategy for my own decumulation phase that removes the guesswork.

When I entered the decumulation stage last year, I naturally let my portfolio settle into a 70/30 allocation—70% in equities and 30% in bonds. Going forward, I plan to draw my “paycheck” quarterly using one incredibly simple metric: the S&P 500.

• If the S&P 500 is higher than it was last quarter, I will draw my cash from the equities side of the portfolio.

• If the S&P 500 is lower than it was last quarter, I will draw my cash from the bonds side of the portfolio.

Here is the absolute most important rule of this system: I am never going to replace my bonds.

If I drain bonds during a down quarter, they stay drained. If, following this rule, I eventually end up with a bond-weighted portfolio, only then will I rebalance to equities.

By following this rule, over the course of eight to ten years, I will eventually spend down more and more of those bonds. My portfolio will naturally glide into a 100% equity allocation.

This makes perfect logical sense. Sequence of returns risk is primarily a danger during those first six to seven years of retirement. Once you survive that initial window, the risk drops dramatically. Gliding your equities up as your sequence of returns risk goes down is exactly what you want to happen.

Yes, depending on whether you are selling from a Traditional IRA or a taxable brokerage, there is some tax arbitrage you have to figure out along the way. But the overarching philosophy takes the anxiety out of the equation. There are no buckets to refill, no complex formulas to track, and no constant second-guessing. You simply look at the market once a quarter, make your withdrawal, and get back to enjoying your life.

Did you catch this week’s episode of Earn & Invest (Click to listen)?