Retirement Income Bucketing Strategy Explained: Does It Actually Beat a Simple Diversified Portfolio?

9 Jul

*(image created by AI; article written by me)*

The bucketing approach to retirement income — splitting wealth into short, medium and long-term pots — is one of the most popular decumulation strategies, but research shows it produces nearly identical outcomes to a simple, well-diversified total-return portfolio.

If there is one moment that serves as a primary catalyst for seeking financial advice, it is the transition into retirement.

This shift represents a significant emotional hurdle; we often discuss the psychological challenge of crossing the peak from the accumulation phase—where the trajectory feels like a steady climb fuelled by investment compounding and surplus earnings—into a new landscape where those same assets must now fund your lifestyle.

It is also a period of immense financial gravity, with questions such as:

Should you dial back investment risk as withdrawals begin?
How do you structure these withdrawals to maximise tax efficiency
And above all else, is the pot sufficient to sustain your desired standard of living?

We call this a Retirement Income Strategy, and designing these frameworks is at the very heart of our role as financial planners.

Perhaps the most intuitively appealing method is the bucketing approach. At its core, it involves segmenting your wealth into distinct time horizons to address short, medium, and long-term liquidity needs.

In this week’s blog, I look at how this bucketing approach works in practice, while also weighing it against a disciplined total-return rebalancing strategy—which, as the research shows, often delivers an effectively identical end result.

Furthermore, I’ll touch on why both strategies ultimately take a backseat to our preferred methodology: a dynamic guardrails framework that adjusts in real-time to market conditions.

What is the bucketing approach?

The idea — popularised by US financial planner Harold Evensky — is straightforward. Rather than holding one blended portfolio and drawing an income from it, you split your investments into separate "buckets" according to when you'll need the money:

Bucket 1 — the liquidity runway (up to three years).

This initial pot is dedicated to your immediate lifestyle needs, ensuring that approximately three years of spending is held in cash or high-quality, short-dated gilts. By design, this timeframe is far too brief to expose these funds to the volatility of investment risk.

Bucket 2 — the reservoir (typically five to eight years).

Lower-risk, higher-quality assets — mainly high-quality fixed income (e.g. government bonds). This is what you draw on to refill Bucket 1 when equities are going through a temporary slump, so you're not forced to sell shares at a bad time.

Bucket 3 — the growth engine (the long term).

Mostly equities, invested for the long haul and left to do the heavy lifting. When markets are strong, this is where you top Bucket 1 back up.

Bucket maintenance

In short: you spend from Bucket 1, and refill it over time from the other two — taking from the growth pot (Bucket 3) when equities are strong, and from the safety net (Bucket 2) when they're not.

When investing, your capital is at risk. The value of your investment (and any income from them) can go down as well as up, and you may get back less than you invested. Neither simulated nor actual past performance is a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

The benefits of ‘bucketing’

To return to an earlier point: moving from a period of saving — accumulation — to one of spending — decumulation — is one of the most emotively difficult things you'll do as an investor.

This is where bucketing has real appeal. It offers a clear, visible path to funding retirement across the short, medium, and long term, which can help offset some of the anxiety that so often accompanies the early years — knowing exactly where the next few years of income is coming from can be genuinely reassuring.

However, the bigger benefit, in our view, is that it provides some protection against sequencing risk — or, more precisely, the risk of poor investment returns early in retirement, which can derail a plan surprisingly quickly. This is probably the most underappreciated risk in investing and retirement planning, and one we'll be returning to in the coming weeks.

Bucketing helps hedge against it by holding ample liquidity in cash and high-quality fixed income. That gives you the optionality to delay drawing on equities during periods of temporary weakness, meeting your spending needs from those safer sources instead until markets recover.

Rebalancing in disguise

Crucially, we ask the question: does segmenting assets into buckets yield a superior financial result compared to a simple, well-diversified, medium-to-high risk portfolio, or is the advantage merely psychological?

This question lies at the heart of analysis by renowned US financial adviser Michael Kitces. He conducted a comparison between the bucketing methodology described above and a disciplined total-return rebalancing strategy—essentially a blended equity and bond portfolio that is actively managed to maintain its target weights.

He simulated a retiree following traditional bucketing rules:

withdrawing from equities during market upturns;
utilising bonds when stock prices falter;
and tapping into cash only when both asset classes are down.

This was weighed against a simple 70/30 equity/bond portfolio that was reset to its original allocation annually, with income drawn proportionately from the whole pot.

The conclusion was that the two strategies delivered nearly identical end results. For those interested in the technical breakdown, you can find the original study here: Managing Sequence Risk: Bucket Strategies Vs Total Return.

The explanation lies in the inherent mechanics of rebalancing—a powerful tool that systematically sells assets that have appreciated and buys into those that have underperformed. This process effectively mirrors what bucketing attempts to achieve through manual rules. Kitces famously refers to the bucketing layer, when applied alongside regular rebalancing, as an "asset allocation mirage."

In a bucketing structure you spend the cash bucket and periodically top it back up by trimming the growth pot — usually after it's had a good run. In a single, rebalanced medium-risk portfolio you're doing exactly the same thing in reverse: each withdrawal is effectively met by selling down whichever asset class has drifted above target — which, after a strong period for equities, is the equity portion — while the rebalancing trade buys back into whatever has fallen behind. The experience looks different — "my income comes from a cash bucket" versus "my income comes from one single portfolio" — but the mechanics are the same. In both cases you are always drawing on the assets that have performed well and leaving the laggards to recover. One approach just makes that visible and labelled; the other does it quietly, inside a single number on a valuation statement.

Observations on contemporary "decumulation solutions"

The primary takeaway here is that bucketing frameworks are undeniably "good" for smoothing the emotive transition into retirement, and provide a buffer against sequencing risk during those critical early years.

And we are certainly proponents of ring-fencing the initial years of your spending shortfall—the gap between your lifestyle needs and guaranteed income—to establish a stable liquidity glidepath as you begin to draw on your assets.

However, the data suggests that once you look under the bonnet, a simple, well-diversified, medium-to-high risk portfolio (typically carrying 60-80% equity exposure, with the balance in cash and bonds) is effectively as robust as the bucketing model.

A catalyst for this week’s commentary is the recent trend of larger wealth managers rebranding the bucketing approach as a proprietary "decumulation strategy," often implying that a total-return methodology leaves an investor dangerously exposed to sequencing risk.

In our view, this is a misconception. Both paths lead to the same financial destination. Each provides a near-identical framework for retirement income and helps smooth short-term volatility, but beyond that initial horizon both remain subject to exactly the same market forces.

So we'd suggest a degree of caution for anyone being "sold" one of these solutions as something fundamentally more sophisticated than it really is.

Consequently, we advocate for a more streamlined approach:

Earmark approximately two to three years of your projected spending gap—the difference between lifestyle costs and guaranteed income sources—to provide a secure liquidity runway at the outset of retirement.
Utilise a disciplined total-return rebalancing strategy to manage the remaining horizon. This framework is far less complex while yielding identical financial outcomes to bucketing, as the systematic mechanics of rebalancing perform the heavy lifting entirely behind the scenes.

Coming up next

The total-return approach is our preferred one at Blincoe, but it's worth being clear about what it does and doesn't solve. The cash buffer — covering the first few years of spending — helps mitigate sequencing risk right at the start of retirement, when it matters most. But once that buffer has been drawn down, you're at the mercy of market forces from there on, whether you've bucketed or not.

This is where we prefer to go a step further, with a guardrails approach. Rather than setting a spending figure once and hoping for the best, we use repeat cashflow modelling to gauge a sustainable level of spending, and revise it each year in light of actual market returns — taking a pay rise when times are good, and tightening the belt (slightly) through the periodic declines. It's this dynamic, responsive approach that, in our view, is best placed to truly hedge the effects of sequencing risk across a full retirement.