My “Bucket Strategy” for Retirement Spending

I frequently get questions about the “bucket strategy” I’m using for spending my assets in retirement. I prefer not to use the term “bucket” because my strategy differs from bucket methods in important ways. In fact, my retirement spending more resembles single-portfolio strategies.

My decumulation approach involves holding 5 years’ worth of my annual spending in short-term fixed income and the rest in stocks (described in more detail in my post Cushioned Retirement Investing). Each year, I sell enough stock to replenish the fixed-income allocation.

My annual spending each year is calculated from my age and current portfolio value. As I get older, I spend a slightly higher percentage of my remaining portfolio (see the spreadsheet in my Cushioned Retirement Investing post for the exact percentages). If stocks perform well, my annual spending will rise, and if they perform poorly, my spending goes down.

Because my annual spending changes from year to year, I have to calculate how much stock to sell each year. I take my new annual spending, multiply by 5, and subtract the current value of my fixed-income investments. This is essentially a form of rebalancing that has me selling fewer stocks when they’re down and selling more when stocks are up. In rare cases when stocks crash, I might have more fixed income than 5 times my new annual spending, and I actually buy some stocks instead of selling.

Important Differences from Bucket Strategies

No active decision on which bucket to spend from

Many bucket strategies involve making an active decision about whether to spend from stocks or fixed income in a given year. This only makes sense if you believe you have the ability to time the market. I don’t. Most people (maybe all) who believe they can time the market are wrong.

No hard switches between spending from stocks and fixed income

It’s possible to devise a bucket strategy that is entirely rules-based. A simple example would be to spend for the year entirely from fixed income if stocks are more than 20% below their peak level. The idea would be to ride out stock market declines by spending from fixed income until stocks rebound. My strategy has no hard switches between spending from stocks and spending from fixed income.

Other differences from typical decumulation strategies

Predetermined spending changes based on portfolio size

Decumulation strategies often have retirees set a spending level and keep it fixed (possibly with inflation adjustment each year). If stocks perform poorly, these retirees then have to decide when to cut their spending. My strategy automatically adjusts spending level based on portfolio size. This has the advantage of guaranteeing I won’t run out of money. However, it becomes a disadvantage for any retiree who can’t or won’t spend less when stocks disappoint.

Fixed-income allocation adjusts automatically with age

Many decumulation strategies are vague about when to increase the allocation to fixed income investments in a retiree’s portfolio. My strategy uses a fixed rule to increase the percentage of fixed income each year.

No long-term bonds or corporate bonds

I get enough volatility from my heavy stock allocation. I prefer not to be open to shocks in bond markets. So, my portfolio holds no corporate bonds at all, and no government bonds of duration more than 5 years. In fact, I currently have only GICs and savings accounts.

Conclusion

My decumulation strategy is close to single-portfolio methods than it is to bucket strategies. It’s impossible to know whether my strategy will work out any better than anyone else’s. But I prefer to remove as much of my own decision-making as possible. Faced with a decision, it’s very easy to just do nothing. I have a spreadsheet that tells me what to do and when to do it.