The 4% rule gets a lot of attention in retirement planning. But thereâs another number I think retirees should care about: 0. As in: how many times do you want to be forced to sell stocks after theyâve fallen? Thatâs where I like the bucket strategy. It doesnât eliminate sequence-of-returns risk. It gives you a plan for managing it. Hereâs how Iâd think about it. Say you retire with $1 million and need $40,000 a year from your portfolio. Thatâs a 4% initial withdrawal rate. The 4% isnât a return target. It means your portfolio needs to provide $40,000 in your first year. Iâd then build the buckets around that $40,000. 𪣠Bucket 1: $80,000 Two years of portfolio withdrawals. Cash, HISA, money-market funds or short-term GICs. This money isnât there to maximize returns. Its job is to pay you when the market is having a terrible year. 𪣠Bucket 2: a secondary reserve I wouldnât automatically use bonds here. If you donât like bonds, you could use a GIC ladder or other lower-volatility assets youâre comfortable owning. The amount depends on your circumstances, particularly how much of your spending is already covered by CPP, OAS, a pension or other reliable income. 𪣠Bucket 3: the growth portfolio Everything else. $XEQT This is where your diversified long-term investments live. And this is important: The bucket strategy doesnât mean making your entire retirement portfolio conservative. It means protecting enough near-term spending that you donât have to make your long-term portfolio pay the bills during a crash. Now letâs see how it actually works. What if the market crashes? You retire with $1 million. The market falls 30%. You still need your $40,000. But you donât have to sell $40,000 of equities while theyâre down. You take it from Bucket 1. If the downturn lasts longer, you have your secondary reserve. Youâre giving your growth portfolio time. But what if the market has a great year? This is the part I really like. Suppose your portfolio grows from $1 million to $1.15 million. You take your $40,000 withdrawal. Then, while markets are strong, you can harvest some gains and refill Bucket 1. So you have a simple operating rule: Market up â harvest gains â refill the bucket. Market down â spend from the bucket â leave equities alone. Market recovers â rebuild the reserves. Youâre not trying to predict the next crash. Youâre creating a system that doesnât require you to. And the size of the bucket shouldnât simply be a percentage of your portfolio. It should be based on what your portfolio actually needs to provide. If your retirement spending is $60,000 but CPP, OAS and other reliable income provide $35,000, your portfolio only needs to provide $25,000. At a 4% withdrawal rate, thatâs a very different situation from someone who needs the entire $60,000 from their investments. Morningstarâs bucket framework similarly starts by subtracting reliable non-portfolio income from spending needs to determine the amount the portfolio must fund. (Morningstar) And I wouldnât necessarily wait until the day you retire. Iâd start building the structure as retirement approaches, particularly because the first several years of withdrawals are when sequence risk matters most. One more important point: Buckets arenât magic. Research doesnât show that bucketing automatically produces better returns than a simple systematic withdrawal strategy. (Morningstar) Thatâs not why I like it. I like it because it creates rules for the moments when emotions are most likely to take over. ⨠Good market? Take some money off the table. ⨠Bad market? Donât sell just because you need a paycheck. Thatâs not market timing. Thatâs retirement risk management. You donât need to predict the next bear market. You just need a plan that works if one shows up. Not advice, just my opinion. Do your own research.
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39 Comments
Not Financial Advice @anpc86 ¡ 12d
A Cash Wedge is IMHO very smart way to safeguard your retirement. laddered or multi-bucket cash wedge optimizes the cash from just sitting there. its about preparing for inevitable market corrections and downturns. specially if âyouâ donât want to follow market rotation and stay where the capital is flowing
Joe Money@thejoemoneyshow ¡ 8d
CC etfs way better when itâs time to retire.
Ed @edsam ¡ 9d
This is a great approach. Mine has a slight twist because of estate planning. I want my non-investor family to operate the buckets without being hands on. B1 - 10% in ZMMK B2 - 60% in cc ETF. B3 - 30% in growth ETF. Monthly expenses are covered by 70% of distributions from B1&B2. Re-investment increases the monthly distribution by ~10%/year. The distribution can drop 30% without impacting our spending. ZMMK is there for any unplanned large expense or black swan in market. This works out to be ~7% withdrawal rate from 17% IRR.
Catherine @ffcatherine ¡ 12d
This is the plan! Create the buckets that hold liquid cash for 2-4 yrs of expenses so when the next bear market arrives youâre not withdrawing youâre just going about your life & come back to your portfolio on the great years
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