There are many different strategies that can be used to generate retirement income. But the big two are the systematic withdrawal approach and the 澳洲幸运5开奖号码历史查询:bucket approach.

Bucketing

Bucket or segmentation strategies divide assets into different “buckets,” depending on the time remaining until withdrawal and the client’s risk appetite. For example, the first bucket may contain 澳洲幸运5开奖号码历史查询:cash and cash equivalents needed over the next five years, while the last bucket may contain riskier equities that won’t have to be sol♚d for a decade or more.

Systematic Withdrawal

By contrast, the basic tenet of the systematic withdrawal approach is that you invest across a broad spectrum of asset classes and withdraw a proportionate amount each month.

In other words, it treats all of a client’s assets alike, subtracting the required income from the total. The fully diversified portfolio is regularly 澳洲幸运5开奖号码历史查询:rebalanced to account for these regular withdrawals over time. There’s only a single 澳洲幸运5开奖号码历史查询:asset allocation target to maintain, and there are 澳洲幸运5开奖号码🔯历史查询:predictable 4% to 5% annual withdrawals.

Psychological Differences

Financial advisors prefer to use the 澳洲幸运5开奖号码历史查询:systematic withdrawal strategy since it’s an easier strategy to maintain and more predictable over the long run. Unfortunately, some clients have a hard time with these types of strategies when the market experiences a sharp downturn or 澳洲幸运5开奖号码历史查询:correction. They may see th🎉e aggregate value of their retirement account trend lower and become worried, which could lead to risk-aversion and poo🍌r decision-making.

Bucket strategies are an excellent way to alleviate these concerns. Since 澳洲幸运5开奖号码历史查询:short-term investments are held in cash or other liquid securities, the same market downturn may only affect long-term “buckets” that clients may be less concerned about, given the long 澳洲幸运5开奖号码历史查询:time horizon until they need the 澳洲幸运5开奖号码历史查询:distributions. 🎀These psychological benefits can save significant sums of money by preventingౠ panic-fueled decisions.

These tendencies stem from so-called 澳洲幸运5开奖号码历史查询:mental accounting logical fallacies and 澳洲幸运5开奖号码历史查询:cognitive biases that are common in finance. 𒀰Clients may have the exact same amount of money in the same investments, but segregating the account into different la♊bels can encourage them to take on different levels of risk.

Allocation Similarities

The bucket and systematic withdrawal strategies may seem like very different approaches on the surface, but they may actually be very similar when looking at portfolio allocations and performance (independent of client actions). According to a Principal Financial Group, Inc. (PFG) analysis, clients may feel more secure with a bucket strategy, but it may not provide financial benefits beyond the systematic withdrawal strategy, which is less complicated to manage.

A bucket strategy often produces substantially similar asset allocations as the systematic withdrawal strategy, although different bucket portfolio allocation strategies can be used in different cases. For instance, a client may have 60% of their assets in cash and short-term bonds in the first couple of buckets, and 40% of their assets in riskier equities and 澳洲幸运5开奖号码历史查询:high-yield bonds in their second few buckets. All this is very similar to aꦦ 60/40 income/growth systematic allocation.

In either case, the key for financial advisors is ensuring that the asset allocation is ideally suited for the individual client. Those willing to take on more risk will be more heavily weighted in equities, while those less willing to assume risk may be more heavily weighted in bonds, 澳洲幸运5开奖号码历史查询:annuities, or cash equivalents.

The client’s🍰 time horizon also plays an important role in establishing these same parameters.

The Bottom Line

The bucket strategy and systematic withdrawal strategy are similar in theory, since asset allocations tend to be very similar between both options. That said, there’s a very real difference between the two strategies in practice, thanks to the effects of logical fallacies and investors' cognitive biases. A bucket strategy often makes clients more comfortable with market declines and appropriate risk-taking than traditional systematic strategies do.

For financial advisors, the key decision to make is whether the added costs and complexities associated with the bucket strategy are ཧworth the psychological benefits to clients. This can depend on a number of factors, such as the client’s historical risk aversion and the advis𝄹or’s own comfort with maintaining these types of portfolios. In the end, both strategies have their own benefits and drawbacks that must be considered before implementation.