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Understanding Retirement Planning: Bucket Strategy vs Systematic Withdrawals

Retirement planning goes beyond deciding when to retire. It also involves determining how much to withdraw from your retirement funds. There are numerous strategies to ensure a stable flow of income during retirement.

One popular method is the bucket retirement planning, but what does it entail? How does it compare to systematic withdrawals? Let’s delve into these strategies, their advantages and disadvantages, and the factors to consider when choosing between them. See below for the Bucket Strategy Retirement Planning vs Systematic Withdrawals in detail.

Bucket Strategy Retirement Planning vs Systematic Withdrawals

Bucket retirement planning utilizes a set of dedicated funds invested across various asset classes, each referred to as a ‘bucket.’ These buckets can be invested in diverse markets like stocks, bonds, and cash, offering a range of investment options.

The bucket strategy facilitates diversification of investments across different asset classes. Although you draw your consumption from a single bucket, your investments are spread across various markets. This strategy provides full control over the annual withdrawal amount, allowing for investment in riskier assets like stocks. Simultaneously, you can allocate a portion of your funds to safer investments like bonds to cushion against potential market downturns.

An Overview of the Systematic Withdrawal Method

Contrarily, the systematic withdrawal method involves regular withdrawals from your retirement fund. In this approach, all assets are treated equally, providing a steady monthly income. This technique can be used to liquidate or sell investments proportionally to meet income requirements, maintaining a balanced asset allocation across mutual funds and sub-accounts. As per a 1994 study by Bill P. Begen, retirees are advised to annually withdraw four to five per cent of their savings.

Factors to Consider: Bucket Retirement Planning vs Systematic Withdrawal Method

Psychological Differences

While systematic withdrawals offer ease of management and predictability, they may cause anxiety during market downturns or corrections. Retirees may become risk-averse and make ill-informed decisions due to decreasing retirement account values.

The bucket strategy can counteract such concerns. As short-term investments are held in cash or other liquid assets, market crashes primarily impact long-term “buckets”, causing less worry for retirees.

Allocation Similarities

In terms of portfolio allocation and performance, the bucket strategy and systematic withdrawal method are comparable. Despite the potential for different bucket portfolio allocation techniques, the asset allocation mix of these strategies is generally similar.

Conclusion

Although the bucket approach and systematic withdrawal method are theoretically similar due to their comparable asset allocations, practical differences arise due to investors’ cognitive biases. The bucket approach typically provides greater comfort during market drops and encourages proper risk-taking compared to the standard systematic withdrawal strategy.

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