The Pros and Cons of a Bucket Strategy for Retirement Income

The bucket strategy divides your investment assets into three categories.


The Immediate or Short-Term Bucket

This bucket covers a period lasting between two to five years. Money in this category is typically held in savings accounts, Guaranteed Investment Certificates (GICs), and Short-Term Fixed-Income (Bond) Funds. Assets in this category typically pay interest and have little to no possibility of losing value. On the other hand, they have little to no potential to grow in value and often do not keep up with inflation.


As an example, let’s assume that a couple will spend $60,000 per year in retirement and that $40,000 of that amount is covered by Canada Pension Plan (CPP), Old Age Security (OAS), and pensions from employment. The balance, $20,000, must come from the couple’s personal investments. A two-to-five-year period would therefore mean setting aside $40,000 to $100,000 in this bucket.


The Medium or Intermediate-Term Bucket

This bucket covers a period lasting greater than two years and up to 15 years. Fixed income or bond funds would do a good job of covering this range. The farther out you go on the term spectrum, the greater the risk of fluctuating returns, but bonds typically do not respond as dramatically to unexpected events as stocks do, so they offer a relatively lower degree of risk, and accordingly, the potential for greater returns than those at the short-term end of the spectrum.


Following the pattern of the example above, let’s suppose that the couple has set aside five years of spending in the short-term bucket. That’s $100,000. For this medium-term bucket, the couple wants to set aside the next 10 years, up to year 15. At $20,000 per year, that means $200,000 in bond funds.


The Long-Term Bucket

This bucket covers the balance of the investments, no matter the amount. If the couple in our example has $1 million in total, and $300,000 has been set aside in the short- and medium-term buckets, then the remaining $700,000 can be invested in equities. A broadly diversified, global equity fund would do the job here.


The Pros of the Bucket Strategy

It Provides Protection Against Extended Market Downturns

One of the rationales for the Bucket Strategy is to provide investors with a way to avoid having to sell off their stocks in a market downturn. By having money already set aside for the needs of the next few years, even if the stocks in their portfolio are suffering through an extended “bear” market that takes several years to recover, investors who employ a bucket strategy can be confident that there is no need to sell off their stocks to supply their income needs.


Asset Allocation is Easily Determined

In the example above, the couple with a million-dollar portfolio, they know that they can set up their portfolio with a 70% equity allocation, with 10% in cash or short-term equivalents and the remaining 20% in fixed income.


A Bucket Strategy Helps Investors Emotionally

During the “Great Financial Crisis” or GFC, in 2008-2009, in June 2008, the S&P/TSX Composite Index fell from 15,000 to under 7,500 in March 2009. Many investors were discovered to have been “swimming naked after the tide went out,” to adapt Warren Buffett’s memorable phrase. They got out of the stock market and stayed out, embarrassed and fearful of investing ever again. However, if they had employed a bucket strategy, they may have been able to maintain their long-term investment strategy because they would have known that their immediate financial needs were still well under control.


The Cons of the Bucket Strategy

The Strategy Can Result In a Riskier Portfolio

Let’s suppose our example couple employs this strategy and bumps into a bear market as we are experiencing now in 2022. Let’s further assume that this market continues for three years. At the end of three years, $60,000 would be depleted from the short-term bucket, leaving only $40,000. For this illustration, let’s assume that the medium- and long-term assets do not decline any further, but neither do they recover. This means that medium-term assets are down about 13 percent while long-term assets would have declined by about 11 percent. The result:



As you can see, the effective allocation to equities has increased at the expense of the short-term assets, resulting in a riskier portfolio.


Asset Allocation Can Be Too Aggressive or Too Conservative

A bucket strategy does not explicitly define when you should rebalance if at all. If the situation presented in the table above should continue, does that mean that the investor should eventually rebalance, selling off some of the medium- and long-term assets to purchase short-term assets? Or does that undermine the bucket idea? Left to persist, the short-term assets will dwindle even further, resulting in an increasingly aggressive portfolio.


On the other hand, this bucketing approach can force retired investors into an overly conservative portfolio. An older couple might have an allocation to equities that is insufficient to provide them with the necessary returns they need to live in their later years.


Another Approach: Total Return and Rebalance

A total return approach does not try to “bucket” the returns from different sources. Instead, the goal is to generate returns from an investment portfolio across the spectrum of investments, including occasionally selling off bonds and equities. This is known as total return investing. Along the way, the portfolio is rebalanced across the three asset categories of cash (or equivalents), fixed income, and equities. As equities tend to do better than the other categories over the long run, this often means selling equities first to bring the allocation back into balance. In years when equities have a bad year, it might mean liquidating more cash or more fixed income, again with one of the goals being to rebalance back to the target asset allocation.


This can be viewed as a kind of bucket strategy, except it considers the whole of the portfolio and manages the risk of the portfolio to keep it within tolerances. If either of these approaches seems like too much work, then there are “one-fund solutions” that can do most of the heavy lifting for you. All you need to do is to make a withdrawal once in a while as necessary.


Below is a table of some of the more common such ETFs, including a few ESG versions. The most conservative options are at the top, getting more aggressive as you go down the rows.



If you prefer mutual funds over exchange-traded funds (ETFs) then you may wish to consider a variety of global funds. Again, the table indicates categories that are least aggressive in the top row and most aggressive in the bottom row.



There is a vast array of mutual funds from which to choose. One of the most reliable determinants of performance is cost (the MER), but it is not the only one to consider.


Should you use a bucket strategy? It can be a useful approach, but it needs to be tempered by the recognition that it should be used in conjunction with a carefully considered asset allocation.



This is the 164th blog post for Russ Writes, first published on 2022-09-12.


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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.


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