The Bucket Approach for Retirement: A Suboptimal Behavioral Trick?
Posted: 8 Dec 2018
Date Written: October 29, 2018
A bucket approach, which broadly consists of parking a few years of annual withdrawals safely in cash and investing the rest of the portfolio more aggressively, is a popular strategy often recommended by financial planners and typically embraced by retirees. Although this strategy is not devoid of merit, the comprehensive evidence discussed here, from 21 countries over a 115-year period, questions its effectiveness. In fact, simple static strategies, which by definition involve periodic rebalancing, clearly outperform bucket strategies, and they do so based not just on one but on four different ways of assessing performance.
Keywords: Retirement strategies; bucket approach; static asset allocations; rebalancing
JEL Classification: G11
Suggested Citation: Suggested Citation