![]() To the extent that investments are held in taxable accounts, this approach seems all the more sensible. Bucket #2 will generate interest, which can be moved to the cash bucket. Bucket #3 would produce dividends, which can be transferred to the other buckets. One answer to these questions that I've heard proposed is to use interest and dividends to refill buckets. Interest & Dividends Don't Solve the Problem In a down market, shouldn't one be adding to Bucket #3? (more on this question in a moment).How low should one drain the first two buckets before refilling them from Bucket #3, even if the market hasn't recovered?.How much does the market have to recover before one resumes taking withdrawals from Bucket #3?.How much does the market have to fall before one should leave Bucket #3 alone?.While this really is at the heart of the bucket strategy, I've yet to find sensible answers to the following questions: Instead, we allow Buckets #1 and #2 to slowly drain, while we hope for a stock market recovery. Believing that the bucket strategy can insulate us from short-term market fluctuations, we don't transfer assets out of Bucket #3. Let's imagine that stocks are down for the year. The result is that we are effectively spending money each year out of the very Bucket (#3) that is suppose to be used seven or more years down the road. ![]() In addition, if bucket #2 had gone down in value, we would need to top it off from bucket #3 as well.Īll we've really done is take assets from Bucket #3 (stocks) and moved them to Bucket #1 (cash) and maybe Bucket #2 (fixed-income). ![]() Unless fixed-income had a banner year, however, most would come from bucket #3. Some of this might come from bucket #2, if our fixed income investments had gone up in value. One approach would be to refill the cash bucket. A year later it's down to just one year of expenses, Bucket #2 has more or less than five years of expenses, depending on performance and inflation, and Bucket #3 has gone up or down based on market performance. As we begin retirement, we have two years worth of expenses in Bucket #1. Let's assume we use the 3 bucket strategy described above. Notwithstanding its initial appeal, there are both theoretical and practical problems with the Bucket Strategy. Why the Bucket Strategy is Flawedįirst impressions can be deceiving. Third, it's easy to understand, an important criteria for retirees who, unlike me, don't spend their time reading white papers on the 4% Rule. Second, it isolates risky investments like stocks into a bucket that won't be touched for many years. Even if stocks drop precipitously, the retiree is protected with two years of cash and another five years of relatively safe bonds. First, it appears to insulate a retiree from short-term market fluctuations. This strategy has an initial appeal for several reasons. Interest rates, market conditions, tax and legal rules and other investment factors are subject to change.(Note: The number of years worth of expenses in buckets one and two above can be adjusted to meet a retiree's specific risk tolerance.) ![]() This will ensure that individual circumstances have been considered properly and that action is taken on the latest available information. Readers should consult their own professional advisors when planning to implement a strategy. While efforts are made to ensure the accuracy and completeness of the information at the time of publication, errors and omissions may occur. The case studies included do not represent actual events or real individuals. All charts, illustrations, examples, case studies and other demonstrative content are general and have been provided in this publication for illustrative purposes only. The content of this publication is provided for informational purposes only and is not intended to provide specific financial, investment, tax, legal, accounting or other advice for you, and should not be relied upon in that regard. RMFI is licensed as a financial services firm in the province of Quebec. RMFI, RBC Global Asset Management Inc., Royal Bank of Canada, Royal Trust Corporation of Canada and The Royal Trust Company are separate corporate entities which are affiliated. Financial planning services and investment advice are provided by Royal Mutual Funds Inc. ![]()
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