Comparing a Bucket Strategy and a Systematic Withdrawal Strategy
One of the most important services financial professionals offer their investors may be a well-structured and sustainable retirement income strategy.
Considering the many methods for structuring such a strategy, this process may be overwhelming to retirees and financial professionals alike. The risks in retirement are different from the risks an investor may have faced while accumulating retirement assets, and often a retiree needs help to thoroughly understand and evaluate these differences. A financial professional’s guidance can be of great help throughout this process.
In this article
- More on the Bucket Strategy
- Psychological Benefits
- An Economic Comparison
- Problems Left to Solve
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One approach to developing a retirement income plan is the bucket strategy. A bucket strategy segments retirement assets by certain categories. Categories may be based on the risk level of the assets, the needs or expenses these assets are expected to cover or the period of time in retirement when the assets are expected to generate income. The most widely used bucket strategy is the time-segmentation approach, which is used by almost one-third (28%) of financial professionals, according to the Financial Planning Association. This approach assigns each bucket to a defined time period in retirement, based upon the retiree’s risk tolerance and time horizon. It anticipates that the allocation will shift over time to traditionally more conservative asset classes as the retirement savings are drawn down.
This article analyzes the potential advantages and shortfalls of the time-segmented bucket strategy, which we refer to here as simply the bucket strategy, by comparing it to the most common strategy in use—systematic withdrawals. The two strategies are compared based on the psychological and economic benefits they can offer a retiree.
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