The Real Limits of Bucket Strategy in Retirement

Sequence-of-return risk can persist despite using a bucket strategy in most market conditions

- RAVI SARAOGI

In our last column, we highlighted that high equity allocation in retirement can reduce safe withdrawal rates due to sequence-of-return risk. This provoked a lively debate. Several readers suggested that a bucket strategy—where withdrawals come from safer assets—might allow retirees to hold more equity without worsening outcomes.

In this follow-up, we examine why this is not true. The main criticism of our earlier analysis was that the withdrawal strategy suffered from a key drawback: We were allegedly withdrawing from equity when the market was down, leading to poor outcomes. Many suggested that a bucket strategy would allow equity to recover after downturns as withdrawals will happen from the debt portfolio. This would permit retirees to maintain higher equity allocations without the adverse effects of sequence risks. However, in our earlier analysis, withdrawals were made exclusively from the debt allocation. In this respect, our analysis was similar to a bucket strategy: We used the debt bucket as a buffer, giving equities time to recover. The similarity ends there, though.