Systematic Withdrawals vs. Buckets Strategy

There are two competing strategies for taking withdrawals from a portfolio after retiring. One is known as systematic withdrawals. This is when you set a formula for taking money from the portfolio. The most common formula is a percentage of the original value (usually around 4%) the first year, plus an inflation factor for each succeeding year. The portfolio investment strategy is based on the markets, your age, risk tolerance, and other factors.

The second strategy is known generally as the buckets strategy. Some also call it time-based segmentation. In this strategy, you put money you’ll need in the next two to five years in safe investments. Money you’ll need in up to 15 years is put in a little more risky investments. Money you don’t expect to need for 15 years or longer is invested in risky investments such as stocks.

There’s an ongoing debate over which is the better strategy, and we’ve aired the debate in Retirement Watch. Many people believe the two strategies will have essentially the same investments, but the buckets strategy gives some people more comfort and makes them less likely to sell at the bottom of a bad market.

The Principal Financial Group decided to compare the two strategies with hypothetical scenarios. The white paper (which is available to financial advisors but not to the public) is generally evenhanded but concludes that the buckets strategy is more complicated to implement and might not provide portfolio changes as often and as timely as those offered through a traditional portfolio, such as a target date fund. The buckets strategy does tend to make the investor feel more secure. The systematic withdrawal strategy is likely to generate better financial results, says the Principal.