Four bucket strategy misconceptions

It's an intuitive way to organize your in-retirement portfolio, but it's not a miracle worker.

Christine Benz 19 October, 2018 | 5:00PM

Setting an asset allocation and figuring out a mechanism for drawing cash flow from your portfolio is a daunting exercise. That's why the Bucket strategy can be so useful: It can help you visualize an appropriate portfolio structure based on your spending needs.

Starting with the amount you need to draw from your portfolio each year, you can then position your portfolio based on your expected spending horizon. Money for the next year or two should go in cash (Bucket 1), the only asset class where your principal is guaranteed. Assets for which you have a slightly longer horizon can go into high-quality bonds (Bucket 2), which have historically returned more than cash while holding principal fairly steady for time horizons of five years or longer. The remaining assets can go into stocks and other higher-risk/higher-returning assets (Bucket 3).

That seems really straightforward, but implementation can be a bit messy. How does that cash bucket get refilled, anyway? What role, if any, do nonportfolio assets like government pension benefits play in the Bucket approach? Investors have lots of questions, and there's a fair amount of confusion over how to make a Bucket approach work. Here are some of the key misconceptions I hear bandied about in relation to the Bucket approach.

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About Author

Christine Benz

Christine Benz  Christine Benz is Morningstar's director of personal finance and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances and the Morningstar Guide to Mutual Funds: 5-Star Strategies for Success. Follow Christine on Twitter: @christine_benz.