Retirement Bucket Strategies: Cheap Gimmick or the Solution to Sequence Risk? – SWR Series Part 48

September 14, 2021

Welcome to a new installment of the Safe Withdrawal Rate Series, dealing with Bucket Strategies. This is one approach that’s often considered a viable solution to the dreaded Sequence Risk Problem. Simply keep buckets of assets with different risk characteristics designated to cover expenses during different time windows of your retirement. Specifically, keep one or more buckets with low-risk assets to hedge the first few years of retirement. And – poof – Sequence Risk evaporates, just like that! Sounds too good to be true, right? And it likely is. Long story short, while there are certain parts of the bucket strategy that can indeed partially alleviate the risk of retirement bust, bucket strategies are by no means a solution to Sequence Risk. Let’s take a look at the details…

A favor to ask

Before I get started today, I wanted to direct you to my buddy Victor Vulpescu’s podcast. He interviewed me recently on safe withdrawal strategies, sequence risk, glidepaths in retirement, and much more. I was really impressed with the preparation he put into his Q&A session with me. Very thoughtful and challenging questions – one of the most finance-savvy podcasters I have ever encountered. I would really like to drive some traffic to his content because it’s a true undiscovered gem:

His podcast is obviously a smaller, less-known one, but he has been able to land a lot of heavy-hitters and some of my favorite speakers in the industry:

  • Rick Ferri
  • Paul Merriman
  • Meb Faber
  • Larry Swedroe
  • Lars Kroijer, and more


Now, back to today’s topic. Let me start by looking at one form of the bucket strategy that will certainly eliminate Sequence Risk. Though, it comes at a cost…

LDI: The Ultimate Bucket Strategy! And why it’s likely not suitable for today’s early retirees

If you wanted to take the bucket strategy to its extreme, you could certainly just build a CD or bond or TIPS ladder and thus keep one bucket for each retirement year (or quarter or month) to target a mostly risk-free payout on that specific date. Well, it depends on what you call risk-free. If the ladder is implemented with CDs or nominal bonds then you guarantee nominal payouts only but leave yourself exposed to inflation shocks. If you like to hedge inflation risk as well, you would be better served with TIPS.

This matching of assets to specific future expected liabilities at specific times is also appropriately called Liabilities-Driven Investing, or LDI. That’s what some pension funds are doing. You allocate your assets so as to exactly offset your future liabilities, year-by-year; sometimes by investing in bonds that mature at the time you need to service your future liabilities. Sometimes it’s sufficient to simply calculate the average duration of your liabilities and target that same duration in your bond portfolio.

One major headache with this approach right now: To guarantee stable and predictable payouts immune from any Sequence Risk we might have to reduce our retirement budget quite substantially because yields on safe, inflation-adjusted bonds are so low right now! Pushing -2% for shorter-term TIPS, around -1% for 10-year TIPS, and still negative at -0.36% for the 30-year TIPS bonds as of 9/9/2021, see the screenshot from the Federal Reserve below.

Recent TIPS real yields. Source: Federal Reserve, Table H.15.

Does that mean we have a negative safe withdrawal rate? Not really. We can translate real interest rates into Safe Withdrawal Rates using the Excel PMT function. For example, over a 30-year retirement horizon, with a real rate of -0.5%, and the final value target of 25% of the initial, we compute our safe withdrawal rate as:

=PMT(-0.005 , 30 , -1 , 0.25 , 1)

The inputs in the Excel PMT function are:

  • -0.005 for a -0.5% real rate per annum
  • 30 for the horizon (years)
  • -1 for the inital portfolio value (modeled here as a -1 cash flow to indicate we pay $1 into the portfolio today)
  • 0.25 for the final value target (what we take out of the portfolio)
  • 1 to indicate that we withdraw at the beginning of the year, as is usual in the safe withdrawal context (Trinity Study, my own simulations, etc.)

Since bond rates are so low we get some spectacularly low withdrawal rates. Only 2.2% in the numerical example above! That’s substantially lower than all of the historical retirement cohorts, even those that retired right before the worst Sequence Risk episodes, e.g., the Great Depression or the 1970s. Protection from Sequence Risk comes at a steep price!

How about other assumptions? In the chart below I plot the (real) withdrawal rates (assuming CPI-adjustments in withdrawals) as a function of the Real Rate (x-axis) and for different retirement horizons and final portfolio targets. For the current range in real rates, somewhere in the -1% to +/-0% region, we get Safe Withdrawal Rates of around 3% for a 30-year horizon when completely exhausting the portfolio, 2-2.5% when planning to leave a 25% bequest, around 1.5% for a 60-year horizon when depleting the money and well below 1% to slightly above 1% when planning a 60-year retirement and a 25% bequest target. Ouch, that’s getting close to the 0.5% number that Financial Sumotroll, or whatever his name was, “calculated”. I’d rather just try my luck with a Stock/Bond portfolio and a 3.25-3.50% safe withdrawal rate that would hedge even against a repeat of the Great Depression!

Safe Withdrawal Rates as a function of the current Real Rate (i.e., TIPS yield). Two important caveats: 1) there is no 60-year TIPS bond, so we can’t reliably hedge a 60-year retirement with TIPS. 2) the PMT calculations assume that you have a flat/constant TIPS yield term structure. A more precise calculation would take into account the entire TIPS term structure and build a TIPS ladder of bonds with different maturities. But if you pick a real rate roughly equal to the weighted TIPS yields, you’ll get pretty close. For more precise computations, see my post on CD/Bond ladders.

But don’t get me wrong! If we ever move back to an environment like the late 1990s when real bond rates were well above 3%, we could easily push the 30-year withdrawal rates to 5% or even above! Not sure we will ever reach that point again during my lifetime, but I wouldn’t discard the idea completely.

Some further related reading: check out a post I wrote in 2019 on some of the other challenges of translating pension fund mechanics to personal retirement: Part 32: You are a Pension Fund of One (or Two). In a lot of ways, personal retirement is often more complicated than running a pension fund for thousands of beneficiaries.

OK, of course, this is not the Bucket Strategy that most people in the retirement community have in mind. This brings me to the next idea…

Using a bucket approach to design a strategic asset allocation in retirement

Unless you are a successful internet entrepreneur and/or retirement blogger who can afford to keep 100% of his/her/their portfolio in stocks, most retirees will need to design a less adventurous retirement portfolio with some diversifying assets. And then find a way to stick with that allocation. How do you design the portfolio weights then? Well, a bucket approach isn’t a bad idea to start. Maybe keep 3-4 years in cash (money market accounts, short-term CDs, etc.), another 6-7 years in intermediate bonds (10-year maturity), and the rest in stocks. Nice! That gets you an allocation of around 60% stocks, 25% bonds, and 15% cash.

Imagine now that you start with a $1,000,000 portfolio, $40,000 annual withdrawals, and a 60%/25%/15% Stocks/Bonds/Cash allocation. You take out $40k from the cash bucket at the beginning of year 1. You get income/returns of $300, $4,000, and $36,000 in the three respective buckets, which means that at the beginning of Year 2, your portfolio is completely out of whack compared to the 60/25/15 target asset allocation. If we rebalance, we’d need to take roughly 36k and 4k out of the stock and bond bucket, respectively, and transfer that into the cash bucket to bring the portfolio back to the 60/25/15 target.

Numerical example (just for illustration, not a simulation). If we rebalance regularly, we will still effectively withdraw money from the non-cash buckets.

In the second year, if you now take out $40k from the cash bucket again you may think that it came out of the cash bucket, but effectively the money came out of your stock and bond bucket! Money is fungible! Just like in the bucket strategies diagram below, you may think that you took money out of the cash bucket, but of course, the bond bucket continuously spills into the cash bucket and the equity bucket continuously spills into the bond bucket. So, in this sense, the bucket strategy is largely window dressing if you rebalance regularly. The rebalancing will continuously take money out of the Sequence-Risk-sensitive buckets, invalidating the alleged benefits of the bucket strategy! Sorry to pop your bucket, uhm, bubble!

Source:, Advisor Perspectives.

Just to be sure, what I still like about the bucket strategy is the fact that it might give retirees more confidence. Personally, I’d prefer to build up my confidence with my own approach: Play with different asset allocations and see how they would have performed in historical simulations. At least I can study and quantify the pros and cons of different asset allocations and see what performs best during past Sequence Risk events. But, whatever floats your boat; if a bucket strategy makes you sleep better at night, go ahead!

But the bucket approach doesn’t really give you much guidance in how to design your exact bucket sizes. Should your cash bucket be 1 year or 5 years’ worth of living expenses? Should the bond allocation be 5 years or 10 years or 20 years? The bucket approach looks more like a cheap sales gimmick from the Financial Planner industry and/or a “sexy” topic to write about for retirement bloggers. A financial beauty contest, really. But I can’t learn much from looks. Show me the numbers! Show me the simulations!

So, if regular rebalancing just amounts to a fixed asset allocation and the buckets do not really protect you from Sequence Risk at all, should we then just deplete the buckets? This brings me to the next section…

Buckets without rebalancing

What would happen if we exhausted the short-term buckets without rebalancing? Now we can indeed claim that the bucket strategy will leave the high-risk/long-term bucket shielded from withdrawals and thus Sequence Risk. This however brings up one additional headache. If we start with the bucket strategy like the one introduced above and we subsequently exhaust the $150,000 in the cash bucket after about 3.75 years and then the $250,000 in the bond bucket after another roughly 6.25 years, will the average retiree be comfortable with a 100% stock portfolio after 10 years? Your average CFP financial planner would get a heart attack when they hear that. Traditionally, financial planners tend to shift the equity portion down not up during retirement. The same is true for all target-date fund families I am aware of, including Fidelity and Vanguard.

But then again, research has shown that glidepaths in retirement that shift up the equity portion over time can alleviate Sequence Risk. Not eliminate, just alleviate! Michael Kitces wrote about it. Part 19 and Part 20 in my SWR Series deal with this issue. So, I like to present some additional simulations to study the efficacy of a strategy involving a bucket of safe assets, which brings me to the next section…

Bucket Strategy Simulations: ERN-style

To be sure, I looked at the topic briefly in Part 25, and I showed some simulation results. But I never published any dedicated post about this important topic. Which is one of the purposes of today’s post. Let’s assume we use the following baseline model assumptions:

  • A retiree with a 30-year horizon.
  • A 25% bequest target. As mentioned earlier, I like this parameterization because it applies both to a traditional retiree with a modest bequest target, but also an early retiree who wants to bridge the first 30 years of retirement until other cash flows kick in, e.g., Social Security, Pensions, inheritance, etc.
  • A 75% Stock, 25% Bond portfolio
  • No other supplemental cash flows along the way
  • The exact Dollar amount in the portfolio doesn’t really matter because we can scale this up/down to any initial value. But to make this more relatable, I assume that the initial portfolio is $2,000,000.
  • No cash bucket in this baseline scenario!

This parameterization is pretty straightforward to implement in the Safe Withdrawal Rate Google Sheet (see Part 28 for details). Add the asset allocation in the main parameter sheet, set all the supplemental cash flows to zero, and check the results.


Model Inputs

The main results are the failsafe withdrawal rates and $ amounts (scaled to a $2,000,000 initial portfolio). I like to distinguish those failsafe numbers by decade as well, to get an understanding of when those historical worst-case cohorts faced an ugly Sequence Risk problem. Quite intriguingly, the 1920s, including September 1929 was not the worst-case scenario. The failsafe rate was even lower in the 1960s due to the protracted bad performance during the 60s, 70s, and early 80s in both stocks and bonds. This was a worse episode than the Great Depression, from a Sequence Risk perspective because a) it took longer to recover and b) bonds were not very good in diversifying the equity bear market, due to the inflation shock and extreme interest rate hikes under Fed Chairman Volcker.

Main results in the baseline model without any cash bucket.

Next, let’s implement the safe cash bucket. I assume that our retiree sets aside a lump sum of money to guarantee a $5k/month or $60k a year, inflation-adjusted cash flow. I was debating whether I should set that cash flow to $6k, just above the $71,683 annual failsafe, but I decided to round that number down to $5k/month. So, we cover almost the entire worst-case monthly retirement budget for a number of years. This lump-sum amount of money we have to set aside is a function of the monthly cash flow ($5k), the length of time we want to cover with the cash bucket, and the prevailing real interest rate (using the PV function in Excel!). I use cash buckets worth 1 through 25 years in 1-year steps and real interest rates of -1%, 0%, and +1%.

Let’s look at how the failsafe withdrawal amount would have changed if you had deployed this cash bucket approach right before the Great Depression. That failsafe cohort was pretty much consistently the September 1929 retirement date. I plot the results in the chart below. Specifically, the safe withdrawal amounts as a function of the number of years worth of expenses in the cash bucket (x-axis), normalized to 0% at the baseline, i.e., without the cash bucket. And each line corresponds to a different real interest rate.

Even with a -1% real rate for the safe, inflation-adjusted cash bucket, we would have significantly benefited from the bucket strategy. You could have increased the withdrawal amounts by about 10%. Say, from 3.6% ($72,000 p.a.) to almost 4.0% ($80,000 p.a. in a $2m portfolio). Pretty impressive! The peak performance was at 6 years’ worth of expenses. But even larger cash buckets, even all the way to 18 years you’d still benefit from the cash bucket (i.e., the blue line is above 0%). Astonishing, because that would involve setting aside almost $1.2m or almost 60% of the portfolio! If we find ourselves with higher real rates than today, 0% or 1%, cash bucket allocations become even more attractive.

Safe withdrawal amounts as a function of the number of years in the cash bucket (x-axis) for three different real interest rate assumptions.

One word of caution about these simulations: We are indeed doing a little bit of financial simulation “sausage-making”: I model the cash bucket using today’s real interest rates, while the stock and bond returns are the historical numbers from the 1920s and 1930s. Could I have used the interest rates prevailing in 1929? Sure, but keep in mind that back then we didn’t even have TIPS. I could have used the 1929 interest landscape (both short-term and long-term rates far above today’s). Using the higher past short-term interest rates to study the efficacy of the cash bucket seems inappropriate when you get essentially 0% in a money market account today – before inflation! I found my approach the more intuitive way of implementing the cash bucket: use past real stock and bond returns but factor in the cash bucket through a preset real interest rate. But just to be sure, later I also include some simulations using the actual historical short-term interest rates.

On to the next Sequence Risk cohorts. The 1960s had an even slightly lower safe withdrawal rate in the baseline. The bad news is that with a real interest rate too low (-1%), the cash bucket is useless. Even for higher real rates, the bucket would have been ineffective unless you pile at least 10, or better 15 to 20 years’ worth of expenses into your cash bucket. The reason is that the bad sequence risk cohorts during the mid-1960s didn’t see any noticeable bear market until 8-17 years into their retirement (1973, 1980, 1982). To cover the entire bad market event you’d need enough cash to cover your expenses until at least the mid-1980s when the market had swiftly recovered from its 1982 bear market bottom. But that big chunk of the portfolio sitting around and earning negative interest rates drags the blue line below zero. Even for the 0% or +1% real rate, who would have planned for a cash bucket that large in the 1960s? Who would do this today?

1960s safe withdrawal amounts as a function of the number of years in the cash bucket (x-axis) for three different real interest rate assumptions.

Next, let’s take a look at the 1970s, which also had some gnarly bad retirement cohorts right before the 1973-75 recession and bear market. See the chart below. Here we find a positive impact from all three interest rate assumptions and the maximum boost in the failsafe between 11 and 13 years, depending on the real interest rate. The 1973 cohort, right before that bear market had a slightly easier job than the mid-1960s retirees because the overall length of the sequence risk event was shorter. Also, the bear market was bad enough and swift enough, that even with a -1% real yield, you would have greatly benefitted from the cash bucket.

1970s safe withdrawal amounts as a function of the number of years in the cash bucket (x-axis) for three different real interest rate assumptions.

To summarize so far: the cash bucket certainly works both in a deflationary recession (Great Depression) and an inflationary recession (the 1970s) if you keep around 6 to maybe 10+ years worth of safe assets even with a negative real yield. The cash bucket poses more of a challenge when the stock market moves sideways for a number of years and then crashes 10+ years into retirement. If real rates are too low, as they are today, there will be no amount of money in the cash bucket that can ever significantly shield you from Sequence Risk.

Modeling the Bucket Strategy through a Glidepath

The idea of phasing out a component of the portfolio over a certain timeframe should sound familiar. It’s a glidepath! Well, it’s not exactly identical to the glidepath because with a strict bucket strategy there would be no rebalancing between the cash/bond buckets and the equity bucket(s) along the way. On the other hand, the glidepath would stoically rebalance to the (changing) weights along the path every month. Depending on the relative bucket returns this will almost certainly create flows across buckets. Specifically, if the equity market drop is swift and deep enough, you will likely shift funds from the cash/bond allocation into stocks throughout the Bear Market. This form of Dollar-Cost Averaging is in contrast to the strict bucket approach where you withdraw from the short-term bucket and leave the long-term buckets untouched.

Unfortunately, the Google Sheet is not yet set up for studying this glidepath approach over the entire long list of possible retirement cohorts (1,700+ cohorts!). Rather, the current version only allows me to study glidepaths as part of the “Case Study” for one specific retirement cohort at a time. It’s OK for our purposes because I really need to look at the three different cases in the 1920s, 1960s, and 1970s that generated their respective failsafe withdrawal rates: September 1929, November 1965, and January 1973. In each case, I study three different glidepath assumptions:

  • Move 30% into cash/MM, and keep the remaining 70% in a 75/25 portfolio. Transition this 52.5/17.5/30.0 portfolio back to a 75/25/0 portfolio over 10 years. And again, the 30% shift into cash correscponds to $60k p.a. times 10 years.
  • Same as above, but don’t bother about cash or money market. Simply start with a 52.5% stock and 47.5% bond portfolio and shift that back to a 75/25 portfolio again over 10 years.
  • In line with the simulations from Parts 19 and 20 of the series, start with 60/40 and shift that into a 100/0 portfolio over 10 years.
  • For comparison, I also include the results for the 10-year cash bucket, $5,000/month, 0% real rate cash bucket.

In the table below are the final portfolio values, adjusted for CPI, after 30 years of withdrawals. Notice that in the 1929 and 1965 case study I use the 3.60% withdrawal rate, i.e., $72k p.a. out of a $2m portfolio. In 1973 I raise that initial withdrawal rate to 4% or $80k p.a. because in that cohort the 4% Rule not just preserved money but even left you with $670,844 after 30 years.

We can just quickly check that with our 0% real interest rate and a 10-year cash bucket we would have done substantially better than in the base case. Instead of assuming a 0% real cash rate, if we apply actual cash returns during that time we would have done even better in 1929 and 1965, no doubt because actual average real interest rates from short-term bonds were quite a bit higher than 0%. For the 1965 cohort, the 52.5/17.5/30.0 glidepath did slightly worse than the 10Y cash cushion with 0% real interest rates. And that makes sense, too, because cash yields didn’t keep up with rising inflation rates in the mid-70s, and thus the actual real returns of a cash bucket would have been negative. Nevertheless, the glidepath with cash was a success even for the 1973 cohort because the final value at $1.4m+ was more than twice that in the baseline.

Also, it comes as no surprise that during the Great Depression, you would have done even better by just using 10-year Treasury Bonds instead of cash and you would have done spectacularly well with the 60/40/0 to 100/0/0 glidepath. On the other hand, the 1960s and 1970s retirees would have lagged behind the glidepath utilizing 30% cash. But they would have still done better with the bond glidepaths than with the static 75/25 allocation. So the bond-only glidepaths still worked, relative to the static 75/25 baseline. Just not as well as the cash glidepath.

Final real portfolio value after 30 years if implementing the cash bucket/glidepath exactly at the 3 prominent market peaks

What about the Type 1 Error: Have a cash bucket when it wasn’t even necessary?

Finally, I also like to study how much money we leave on the table if we implement the cash bucket at the wrong time. When after the fact it turns out that it wasn’t even necessary. Imagine someone had started retirement a year before the worst-case scenario in September 1928 or January 1972 or two years before the 1965 episode in November 1963. (I didn’t use November 1964 because that looked almost like November 1965). So these are all retirement cohorts with elevated equity valuations, but the market still had 1-2 years to run.

It turns out, all cohorts would have easily met and even substantially exceeded their $500,000 final value target. Quite intriguingly, the 60/40->100/0 glidepaths do quite well. In 1928 and 1972 even better than the static asset allocation (so not even a Type 1 error, after all). In 1963, you lag behind the static allocation a little bit (~$1.27m vs. $1.39m), but that’s small compared to the outsized outperformance for the other cohorts. The 60/40 glidepath would have also significantly outperformed the glidepath starting with 30% cash in all three cases.

Final real portfolio value after 30 years if implementing the cash bucket/glidepath too early.

Update (9/14/2021):

I debated whether I should include a link to buddy Fritz’s blog The Retirement Manifesto because he has written extensively on the bucket strategy approach. Since I was a bit snarky and critical I thought I will hold back. But now that Fritz has commented below and he’s still in a good mood, here are the links to his excellent posts on this topic:

Obviously, we are good buddies and I shouldn’t have worried about poking him a little bit. Also, Fritz and I don’t disagree at all. In essence, Fritz will end up with a 63/27/10 allocation which would roughly correspond to my simulations with roughly 4-5 years of a safe asset bucket and the remaining part of the portfolio in the 75/25 bucket. (a slight mismatch of the weights but close enough).

Fritz also insists that his plan involves rebalancing for as long as the market cooperates and using the cash bucket drawdown only when the market tanks. This will line up exactly with my simulations if you study the historical failsafe cohorts. And even the pre-market peak cohorts that regularly rebalance the portfolio will exactly end up at the market peak before the drawdown with their 63/27/10 intact and then start the cash bucket drawdown when the market retreats in 1929 or 1965 or 1973. So, to answer Fritz’s question below “Not sure if you’d be able to model that, but I’d be interested.”: I did model his approach (or a close-enough variation of it) for the 3 cohorts that retired at their respective market peaks. And just to be sure, the approach “works” if you define “works” as slightly reducing sequence risk. We can never eliminate Sequence Risk. Fritz’s bucket approach and my glidepath approach are not really that different. In fact, his 27% bond, 10% cash drawn down will be very close to my 40% bonds drawn down over time.

Hope this helps clarify Fritz’s question and the questions from the many readers of my blog that also follow his content! 🙂


There you go, finally, I finished the post. After teasing everybody and getting folks excited about the bucket strategy post, I hope that it was worth waiting for another 5 days! 🙂

What I’ve learned from today’s post is that a cash bucket faces challenges when interest rates are low but it certainly works if you deploy it right at the peak of the market. Depending on what kind of bear market we go through, though, the cash bucket might work better or worse than diversifying with a bond portfolio. If you fear an upcoming inflation spike the cash pile will be the better option. If we face another demand-side recession where the Federal Reserve will try to push down the bond term structure again, then government bonds will be better.

I must say that I still like the 60/40 to 100/0 glidepath the best. It wasn’t too far behind the cash glidepath in an inflationary environment, but it does a lot better in a deflationary setting and/or in the Type 1 error scenario where we still have a few years to go in the current bull market.

Thanks for stopping by today! Please leave your comments and suggestions below! Also, make sure you check out the other parts of the series, see here for a guide to the different parts so far!

57 thoughts on “Retirement Bucket Strategies: Cheap Gimmick or the Solution to Sequence Risk? – SWR Series Part 48

  1. This is something I have been thinking about it for a while so thanks for posting at just the right time!

    It would be good to check my understanding on one aspect of the glidepath at the end. Am I right in saying that the pot that you choose to live off during that period should simply be the most tax efficient (based on income tax rates, transactions cost etc) as long as you are adjusting the portfolio to meet the glidepath at the end of each year?

    Also I guess it goes without saying that having a larger cash / bond pot in the beginning reduces the potential upside to your final pot given you miss out on scenarios where the first X number of years was an equity bull market. But that’s the price for the risk aversion.

    1. Thanks.
      “you choose to live off during that period should simply be the most tax efficient ”
      Not likely. Stocks are the most tax-efficient investment among the three S/B/C assets.
      If you live off the cash bucket that would be the least tax-efficient asset.

      But I agree with your second point: To hedge the downside with the cash bucket you also give up some of the upside potential.

  2. Another excellent post with interesting results.

    Re LDI:
    I have noticed that some pension funds using LDI also deploy some leverage. Presumably this is to try and juice things up a bit. What are your thoughts on this combined approach?

    1. Not sure which ones that would be. If you can lever up your bond portfolio at a rate *lower* than the bond yield, you can certainly do so. But if you introduce a mismatch again, say borrow short-term to buy long-term bonds, you invalidate the whole LDI idea again.

      1. Thanks for your thoughts.
        IMO moving a DB schemes funding regime towards vanilla LDI – for want of a better phrase – could legitimately be called de-risking; but a move towards LDI with even modest leverage looks more like re-risking.

  3. Way to complicated — just take your $1M and put them in a series of dividend stocks yielding 4%.. never have to sell shares. Simpler the better and no spreadsheets needed.

  4. All great points!
    Plus if you stick to the “bucket” strategy you’re probably moving more money around than is needed so you could be triggering more in taxes depending on how your assets are structured.

  5. Just want to mention that US govt IBonds (aka Series I Bonds) might be a better option that TIPS for inflation-protected govt bonds if you’re building a bond ladder. Personal limits on IBond purchases can be worked around to some degree using tax refunds allocated to IBonds, revocable trusts buying IBonds, and personal businesses buying IBonds (like an LLC). A couple who each have a revocable trust and who share an LLC could purchase up to 55k/yr in IBonds, iirc. (10k per person (20k) + 10k per trust (20k) + 5k from tax refund + 10k in LLC).
    Minimum holding period is 1yr, minor interest penalties for cashing in before 5yrs, no penalty for cashing after 5 yrs.
    And IBonds never have a negative interest rate. During deflationary periods they simply return 0%.
    (note: direct purchase US Govt IBonds are not the same as the “ibond” etfs some companies market. Those etfs are not, in my opinion, suitable substitutes for direct-purchase govt IBonds)

      1. You buy them directly from the U.S. government at
        They currently pay 3%+ but way inflation is currently going, it looks like the interest rate will go up to 6% when the rates reset in November.
        They are arguably the best option for safe 1-5 year savings goals right now since the Fed is keeping treasury yields extra low.

        1. Again, the real rate is set. They currently pay a 0% real rate, so you will permanently get the CPI +/-0%.
          0% real rate is indeed much better than a 5 year TIPS (-1.7% real) or nominal bonds: 0.7% nominal, which is pathetic.

      2. Finance Buff has more on this. I don’t know the rules here about posting links to other finance bloggers, but I’ll take the risk and drop a couple links here. (I am not affiliated with Finance Buff other than being a regular reader).
        How to Buy I-Bonds:
        Creating Revocable Trusts:
        Apologies if these links are out of bounds for this blog.

    1. Thanks for that.
      I knew about the +5k from the tax return but never considered the other +30k.
      But keep in mind that right now you can still only only get 0.00% real return on the I Bonds. Seems very lean.
      Also, even if you put the entire $55k/year during the last 5 years before retirement you don’t have much in terms of a retirement portfolio. What’s worse, you lose the capital accumulation during the last 5 years of working.

  6. Extremely interesting quantitative analysis as usual! I am wondering if you’ve ever come across Chris Cole’s dragon portfolio, where the investments are much more widely diversified than just equities+bonds. It aims to add components to make the portfolio more robust to secular inflation and/or deflation (long volatility, commodities trend, gold). Similarly to the great analysis you made on the impact of macro factors, I feel that an investigation of this approach as pertaining to SWR could be very interesting.

    The quantitative paper (allegory of the serpent and the hawk) can be found here:

    1. For everyone who’s not interested in reading through the long document (much less give out your email address to get access), here’s the allocation (according to bogleheads,, but please confirm:

      24% Domestic Equity
      18% Fixed Income
      21% Active Long Volatility
      18% Commodity Trend Following
      19% Physical Gold

      Considering that this portfolio currently has 24% in assets with ~3-4% expected real return, 18% fixed income (negative expected real return) and 19% gold (0-1% real return expectation), I don’t quite see how you can survive a 50+-year retirement with with such a low expected return.

      You’d hope that the “active long vol” and “commodity trend following” will make up for that and give you a more significantly positive return.
      I wouldn’t get my hopes up too high. Passive Long Vol has a negative expected return, so you really, really have to rely on on some asset managers saving your butt and pushing the average return positive. It would have to rely on highly proprietary, potentially over-fitted rules that worked in the past. Not sure how this will work in the future.

      Same with commodity momentum strategies.
      Back when I was still working at BNY Mellon, we had an active commodity strategy and I had a (minor) involvement in the strategy. Momentum alone will not give you much. Worked well in the backtest. But now that everyone is doing it, it’s useless. You need a much more complicated strategy to get any kind of noticeable alpha.

      1. You are exactly right about the asset allocation. Some implementations also include leverage to adjust volatility.

        My understanding of the strategy is that the anti-correlation between the different asset classes improves the average risk-adjusted return, sort of like a multi-dimensional efficient frontier.

        From his backtesting data, from 1929 to 2019:

        nominal annual returns:
        dragon portfolio: 5.4%
        US equities: 7.5%
        classic 60/40: 6.1%

        max drawdowns
        dragon portfolio: -34%
        US equities: -79%
        classic 60/40: -74%

        Seems to be similar as well for shorter time-periods.

        I am mostly intrigued by the overall downside risk that appears to be significantly lower with this strategy, and I had a feeling that it could have an impact on sequence of return risk, which might compensate for a lower average return. Otherwise, I see the main advantage as a potential hedge against unexpected idiosyncratic tail risks like a complete change of the financial or geopolitical system. Still, I very much agree that some assets used in his strategy are very difficult to replicate for retail investors. It would have been great to have access to his raw time series data in order to simulate with your SWR platform.

        Thank you for your detailed answer 🙂

        1. When did the 60/40 portfolio have a 74% draw-down? I’m guessing that that should be ~54%. Also it was only for 2 months in 1932, if you exclude those two months, the next biggest draw-down was 46%.

          1. From what I gather in the paper, in order to compare the portfolios, he normalized them to have a volatility (stdev, I presume) of 15. These drawdown percentages correspond to the normalized (i.e. leveraged) portfolios. Sorry for the confusion.

            However, the nominal returns I provided in previous comment are non-normalized. For normalized to 15 vol, he gives:

            nominal annual returns:
            dragon portfolio: 14.4%
            US equities: 6.4%
            classic 60/40: 7.9%

            for inflation adjusted values:

            annual returns:
            dragon portfolio: 10.1%
            US equities: 2.3%
            classic 60/40: 3.9%

            max drawdowns
            dragon portfolio: -49%
            US equities: -82%
            classic 60/40: -78%

            1. That doesn’t make sense either. The initial values (unscaled) were wrong. And scaling them to 15% doesn’t make them any better.
              So, I would not want to put much trust into that study. If they can’t simulate a simple S&P500 or 60/40 portfolio, I have no idea what else they messed up.

        2. Not sure anymore if I would trust them. Here are the returns I get. There is some ambiguity as to what they use as a starting date: 12/31/1928, the monthly market peak 8/31/1929 or 12/31/1929. I computed all 3 versions, but get vastly different results:

          12/1928-12/2019 9.49%
          8/1929-12/2019 9.22%
          12/1929-12/2019 9.71%

          12/1928-12/2019 8.26%
          8/1929-12/2019 8.11%
          12/1929-12/2019 8.38%

          Worst drawdowns is indeed -79.35% for the S&P 500, but -52.80% for the 60/40. Not -74%!

          Sorry, I’m afraid if they can’t cobble together a simple return calculation, I don’t trust their backtests of the two “active” portfolios for the long-vol and commodity momentum strategies.

          Besides, inflation was about 3% during that time, so their dragon portfolio had only a 2.4% real return. But still 34% drawdown. That’s pretty bad!

          Mystery solved: Don’t use the Dragon Portfolio! 🙂

          1. For the backtest period, I see that they mention “1928 to August 19, 2019” so the end date might explain the discrepancy in returns. Sorry for the omission.

            I agree that the -74% drawdown for the 60/40 portfolio doesn’t seem to make sense. I think that max DD values given are for the vol-adjusted portfolios, hence is it possible that the unscaled US equity already had a volatility of about 15 whereas the unscaled 60/40 had perhaps a volatility of about 11, which might explain these values?

            “Besides, inflation was about 3% during that time, so their dragon portfolio had only a 2.4% real return. But still 34% drawdown. That’s pretty bad!”

            I’m not sure if I understand this one. Scaled dragon portfolio purportedly had a 10.1% real return and 49% max drawdown (ignoring borrowing costs). Some leverage does indeed appear to be necessary with this approach (a bit like a risk parity approach), but I wouldn’t call those results bad (if they are correct, of course!)?


            1. OK, if their strategy is easily scalable, then sure, you want to scale up the low-risk, high-Shapre Ratio strategy. Did they mention how many times you have to lever this up? And what rate they use for borrowing/leverage? That’s because the average cash-rate was 3.5% over this horizon. How can you take a 5.4% gross return strategy and scale it up to 14.4%?

              That’s a lot of leverage. And it’s not 14.4/5.4=2.67.
              You need to solve: 5.4 + X (5.4-3.5)=14.4. Hence X=4.73.
              That’s too much leverage, my friend!

              Long story short, we are adding more and more uncertainties and ways for this to fail: 1) the uncertainties of the two alpha strategies and the 2) the prospect of leverage constraints and margin calls when you run this at multiple times leverage.

              This strategy looks more and more like a gimmick. And the fact that they proclaim they have a 14%+ leveraged return “ignoring borrowing costs” shows that they might not know what they are doing. I’d stay away from this strategy and particularly that firm.

  7. Why do you hate me so much? Wink.

    One relevant clarification on how I’m using the Bucket Strategy (which, to me, is really just a name game to help visualize my asset allocation strategy). I keep Bucket 1 “full” (3 years of cash) when the markets are doing well, selling enough of whatever is up the most to “refill” what I’ve spent each quarter. So yes, it’s a rebalancing play. If/when the market drops, I’ll draw down the cash in Bucket 1 instead of selling stock for my quarterly refills. If Bucket 1 gets to <1 year of cash (e.g., a 2-year bear), I'll sell whatever has declined the least to cover the next year's spending (likely bonds from Bucket 2 in a long-term bear scenario).

    Hope that helps define how I'm using it. Not sure if you'd be able to model that, but I'd be interested. It's easy to manage, and yes, it helps me sleep well at night.

    1. Haha, sorry, Fritz! I was debating if I should mention you by name. Now that you’re already “offended” I might as well link to your site! I will add an update and a comment to address your market timing suggestion. 🙂

  8. I was about to ask then, if bucket doesn’t work, what works in the same area? I’m 50/50 right now and will glide to 75/25 on the next crash.

  9. Interesting read.
    I wonder if investing only in less volatile sectors (Consumer Staples, Utilities, Health Care) would result in better outcome.

    1. Yes. If you know what sectors are going to be the low-vol ones next time around.
      Also, 2020 was really good for IT, a low-dividend and high-volatility sector. While some of the more brick-and-mortar and ostensible stable sectors are lagging. It’s not easy to time the business cycle through sector rotation.

      1. No timing of the business cycle, just investing all the time in those sectors, which are less cyclical.
        2020 is an interesting case study because of the quick, V shaped recovery. I think it was the quickest recovery in history.
        If we look just at the crisis side (2-3 2020), IT fell 30% top to bottom while CS fell 23%.

        1. But top-to-bottom is just one feature. The speed of recovery is also important. Remember: Sequence Risk is determined not just by the depth but also the length of the drawdown.

          But generally, yes, why not invest in low-risk stocks? There is some evidence that low-beta stocks have better risk-adjusted returns. The same will also likely translate into low-beta sectors being attractive.

  10. Thank you for your post. I am struggling with this issue for a while, trying to set apart the technical (mathematical) and the behavioural (mental accounting) aspects of the bucket approach.

    I though I had made my mind on the technical part after reading this study from J Estrada with extensive simulations, but your simulations seem to point to a different conclusion

    1. Haven’t read through the entire thing. But different assumptions. I looked at mostly the worst-case scenarios. If you optimize more of an average retiree’s utility function you may get different recommendations.

  11. Karsten – Wonderful interview with Mr. Vulpescu. I frequently reread posts from your safe withdrawal series (as well as other misc posts), and this podcast provided impetus to reread certain posts that I haven’t touched in a while. Can’t wait for the future parts of the interview to be released!

    Thanks also for this current posting. Interesting comments re. bucket strategy (particularly Fritz’s version of it) and diversifying with a bond portfolio. While impossible to know which will fare better, the bucket strategy has a psychological edge, I think, in that “cash under the mattress for a rainy day” is always somehow comforting. In any event, laying out certain guidelines to follow is so superior to mindlessly “winging it”, regardless of the particulars of which time-tested strategy one chooses.Your contributions to are awesome, and so much appreciated.

  12. Hi Big ERN,

    I listened to the podcast you linked which was very informative. One concern I had in using CAPE for rolling allocation rules was the very issue you mentioned of not having a similarly robust valuation measure for the alternative asset. Are you aware of any measures like this for the alternative asset that at least have a cyclical component inversely correlated with CAPE?

    Second, you talked about tactical allocation. I believe it was on some kind of rolling basis. Do these kinds of methods ever work beyond the backtests? Any particular magic rolling period (10Y, 5Y, etc.) of re-estimation that works better than just using the past full data for flat mean/vol estimates?



    1. First of all, asset allocators will more likely look at future expected earnings, not rolling past earnings. The problem with that approach. We don’t have EPS expectations going very far back!

      I once did a study wondering if we should redo the Shiller calculations and use different weighting on the past 10 years of earnings. Doesn’t need to be 1/10 weight on each right? It turns out that equal-weighting all the ten past earnings years is actually the way to go.

  13. Thanks for the post. I always wondered why those considered so smart, like C. Benz at Morningstar, are always hyping a bucket strategy, when in reality, it’s just window dressing. You said it best: money is fungible. If people hype it as a feel good strategy, they should say so.

  14. Good analysis. It sounds like the 5-10 years of cash that saves you from a market crash within the first 5-10 years comes at the cost of not having enough stocks to have outrun the market crash in years 11+. You have time-shifted SORR, but probably for no net gain in the long run. 2 Thoughts:

    1) As an early retiree, I want to know as early as possible if I’m not going to make it. If a SORR is realized in year 3, I can just go back to work as my fallback plan, but this gets harder and harder, pays less and less, and involves less available portfolio recovery time the longer I’m retired. Thus I DO NOT want to time-shift SORR into the distant future. If anything, I want to invest aggressively NOW so that if I happen to be in an early retirement SORR event cohort, I’ll find out while there’s still time, and if not, then my investment returns will outrun a SORR event in the distant future. This is the FIRE person’s case for a 100% stock allocation. Chances are good you outrun any future SORR event within your first few years and never worry again.

    2) To sustain a portfolio forever, you’d need a X% long-term real rate of return to support a X% WR. There is nothing like a typical WR available in the world of bonds or cash, and many would argue there’s nothing like that available from stocks. Thus, the extent our portfolios generate 3.5% – 4% real returns in the long run from components that don’t yield that much individually will depend on rebalancing. However, bonds are currently very close to the somewhere-sub-zero boundary. What happens to the plan to rebalance one’s way to a 4% real return when bonds are pinned against the floor, and face increasing pressures preventing the yield from falling beyond a certain point? If rebalancing no longer works like it used to, that calls into question the modern applicability of most historical AA simulations. No past cohort has ever started with rates this low.

    3) If options are efficiently priced, the realized value of a wide selection of LEAPS call options sampled over a long period of time will equal zero. That is, the winning options would be expected to exactly pay for the ones that turn out worthless, just like the expected outcome of a coin flip game is expected to break even. If this was not true, there would be risk-free economic profits to be made either buying or selling options. So in other words, if I held 40% of my portfolio in cash plus enough long call options to control stock worth 40% of my portfolio, that portion of my portfolio would have an expected nominal return of 0% just like an all-cash allocation would. I wonder under what circumstances that would be preferable than 40% bonds or 40% straight cash. As an early retiree, I’m interested in the optionality of avoiding damage from an early SORR event while also preserving my ability to outrun later SORR events. Not sure how to optimize this idea, but at least the calls can only lose a tiny fraction of the portfolio’s value in a crash.

  15. Hi ERN, when you say that you shift 0,4% p.m. from bonds to stocks and you say that you withdraw 3,6% p.a. (broadly equivalent to 0,3% p.m.) from the portfolio this means that you shift 0,1% p.m. from bonds to stocks and use 0,3% p.m. for living. Is that correct? Thank you.

  16. Any time someone talks about Type 1 error I know I’m getting some good stuff and not just a bunch of personal opinion! 😉 Great post. Aspiring CFP here and I love how practical and applicable this is.

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