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In the column of insurGuru©️ Retirement College, we share "How to withdraw the pension, so that we can have money to spend our whole life"of"4% four percent strategy". The LifeTank©️ column analyzes another popular retirement pension "bucket strategy", this article will introduceWhat is the bucket strategy for retirement, how it works, and what are the problems?.
1. What is the bucket strategy for retirement?
Retired bucket strategy,Is to divide our retirement savings into three "buckets".Its purpose is to achieve a lifetime pension strategy through dynamic balance management of the funds in the three buckets.
This method of withdrawing money for retirement has received widespread attention after the 2008 financial crisis.During the financial tsunami that year, those retirees who put their pensions in stock securities lost most of their life savings and were unable to retire smoothly. After that, the retirees realized the importance of asset realization.
(>>>Recommended reading:How much does it cost to retire in the United States?|What is the 4% rule and the 10 times rule of retirement?)
2. How to use the retired bucket strategy?
The bucket strategy for retirement is to put our funds in three buckets, and balance the "water" according to the income of the buckets.
The first bucket,Keep our emergency funds, as well as the living expenses or main purchase funds in the next 1 to 3 years.
These funds should focus on maintaining liquidity,This way you can use them when you need them without worrying about market ups and downs.
In the second bucket,Hold the money that we will use in the next 3 to 10 years.According to risk tolerance, combined with market choices, we can put these funds in some relatively safe investments.
When the economy suffers a downturn, we have 1-3 years to wait for the water in the second bucket to recover.And when the market is booming, or when we run out of funds in the first bucket, we can withdraw some funds from the second bucket to replenish the first bucket.
In the third bucket,Deposit money that we do not plan to use for at least 10 years.Because there are 10 years, we can consider expanding some risk tolerance and invest this money in assets or financial instruments with greater growth potential.
According to the profitability, we can regularly sell some profitable assets in this bucket and put them back in the second bucket, because the investment option of the second bucket is less risky and safer.
3. Is the bucket strategy good for retirement?
The core of the retirement bucket strategy,It is the continuous rebalance of 3 retirement accounts (Rebalance), which is widely used in various investment fields.
So is the "bucket strategy" of pensions the best way?
The Business School of the University of Navarre in Spain conducted research on 21 countries including the United States, Japan and more than 100 years of historical data. The special research report published in 2018 shows that*,The failure rate of retirement "bucket strategy" is 4%-5%.
In general, the "bucket strategy" has a success rate of over 95%, which is effective for most people.But once the probability of 4% to 5% happens, at the age of 70, 80, and 90, they will face the dilemma of no money available, and the retired people will suffer a great financial impact.
Another result of the research,If you don't take any risks at all, put 100% of your retirement pension in a risk-free "living cost bucket", and do not make any investment and financial management, then the retirement failure rate will reach nearly 70%, which is almost doomed.(End of the article)
Appendix Literature
*. "The Bucket Approach for Retirement: A Suboptimal Behavioral Trick?", Dec.2018, Javier Estrada, https://blog.iese.edu/jestrada/files/2019/01/BucketApproach.pdf
