The Bucket Strategy®, a unique approach to retirement withdrawals, is gaining traction throughout the financial advisory world for its methodical (yet simple) execution. Unlike the more commonly used “Systematic Withdrawal Plan” with automatic rebalancing, The Bucket Strategy® focuses on spending safer, less volatile assets first, which gives riskier investments like stocks the time they need to potentially grow.
This strategy is a direct counter to the dangers of what’s known as reverse dollar cost averaging and sequence of returns risk. Traditional dollar cost averaging during the accumulation phase benefits investors by allowing them to purchase more shares when prices are low, thus reducing the average share cost over time. However, when it comes to withdrawals, the reverse can force investors to sell more shares during market downturns to maintain their cash flow, permanently reducing their investment balance.
The beauty of The Bucket Strategy® lies in its ability to render short-term market volatility irrelevant. By drawing from “safer” buckets in the early years of retirement, this approach avoids the need to sell fluctuating stocks. These volatile investments are left untouched, often for over a decade, allowing them ample time to recover and gain value, thus capitalizing on the benefits of dollar cost averaging by reinvesting dividends and potentially gathering gains from long-term market appreciation.
Additionally, the strategy is flexible enough to allow for strategic reallocation. Investors can refill these safer buckets with profits taken from the more volatile investments as needed or simply draw directly from the growth assets after they have accumulated appreciable returns.
Support for The Bucket Strategy® isn’t just anecdotal; it’s backed by substantial academic research and data analysis. Studies suggest that it can yield superior results compared to traditional strategies that involve frequent rebalancing. For instance, historical data shows that there has almost never been a 15-year period where the S&P 500 has failed to produce a positive return, provided dividends were reinvested. This fact underscores the strategy’s effectiveness in leveraging long-term market trends without the need for complex market timing or frequent trading.
What’s more, The Bucket Strategy® is not just about optimizing returns; it’s also about enhancing investor behavior. The simplicity and clarity it offers help manage the psychological aspects of investing, which can often lead to poor decision-making. According to Dalbar Inc.’s annual Quantitative Analysis of Investor Behavior report, the average equity fund investor has consistently underperformed the broader market by a significant margin. This underperformance is largely attributed to poor timing and emotional trading decisions.
In essence, The Bucket Strategy® offers more than just a financial planning tool; it serves as a behavioral framework that helps investors maintain discipline and patience. This is crucial, as the mental and emotional aspects of investing can often be as challenging as the financial decisions themselves.
If you’re looking for a straightforward, effective way to manage a client’s retirement savings, The Bucket Strategy® presents a compelling option. It minimizes risk during the vulnerable early years of retirement and maximizes the potential for growth over the long run.
As they say in the investing world, there’s no such thing as a free lunch – but with patience and a solid strategy, dessert might just be on the house!
