Retirement Withdrawal Strategies: Systematic vs. Bucket

You’ve spent years diligently planning, preparing and strategizing for retirement. But when the time finally comes to retire, do you know what to do next? 

Once your last paycheck has been deposited, you now bear the responsibility of creating a steady income throughout retirement. That’s where retirement withdrawal strategies can come into play. Spending your savings without the checks and balances of a proper plan in place could leave you in a situation without enough income to support your goals and lifestyle. In fact, 37 percent of today’s retirees are most afraid of running out of savings in retirement, while 23 percent fear they won’t be able to meet the basic financial needs of their family.¹ 

As you work with your financial planner to create a withdrawal strategy throughout retirement, you’ll want to consider the differences between two of the most popular strategy types: systematic withdrawal and the bucket approach.    

What Is The Systematic Withdrawal Strategy?

A systematic withdrawal strategy pulls income from the total sum of your retirement account. In this strategy, all of your assets are treated the same, as you pull a certain amount of income per month from your invested assets. When withdrawing from investments, the systematic withdrawal strategy can be used to liquidate or sell what is needed to meet your income needs at a proportional rate. This helps to keep your asset allocation balanced as you draw from various mutual funds and other sub-accounts. Based on a well-known 1994 study conducted by Bill P. Begen, the ideal amount to withdraw is four to five percent of a retiree’s investments per year.² 

What Is the Bucket Approach?

The bucket strategy puts your wealth into categories (or “buckets”) based on certain criteria. Because the most common criteria type is a time-segmented bucket approach, that’s what we’ll discuss here. In this type of approach, each category represents a time period in retirement. These are generally broken down into set intervals, meaning the buckets represent the first 2 years, then 3-5 years, and then 5 years and up.

What is segmented into these buckets is determined by each retiree’s unique risk profile and timeline. In general, you can think of the assets belonging in each bucket as ranging from least-risky to riskiest. For example, picture three buckets representing 5-10 years in retirement. The first bucket, the one in which you’ll need to access immediately, would consist primarily of cash and similar assets. This makes sense, as you need a steady, safe source of immediate income. The second bucket, which represents what you’ll need 3-5 years down the road, can hold investments and assets that are a bit riskier. These could include fixed-income securities and other similar investments. And for the third bucket, which you plan on accessing 5+ years into retirement, you could include your riskiest investment types, such as equities. You’ll likely want your riskiest investments in the third bucket because they have the most time to recover from market swings and downturns.

As you carry on throughout retirement, these buckets are meant to be rebalanced and redistributed regularly based on your financial needs and market conditions.

Important Psychological Considerations

While withdrawal strategies may seem all about the numbers, taking in the psychological considerations of each approach can actually help you and your financial planner to determine which option is best for you.

In general, people find that the bucket approach is a bit easier of a concept to digest. It offers easy-to-understand organization of assets, and it can be clearer to align with certain financial goals throughout retirement. Additionally, the bucket strategy can offer more reassurance during sharp market downturns, as retirees see only their “long-term” bucket affected, rather than their entire retirement account.

The systematic withdrawal strategy does not offer the same amount of psychological reassurance as it’s counterpart. People may find this approach much more overwhelming, as they’re dealing with their retirement accounts and investments in their entirety, as opposed to small, segmented pieces.

If you’re heading to retirement and wondering how you should be using the money you spent decades accumulating, you’re not alone. While the type of strategy you use should be determined based on your personal circumstances and needs, it is important that you put a plan into place. Doing so will help prevent headaches and financial distress later and allow you to live a less stressful retirement. 

Spiritual Application

One way I like to think about retirement is a marathon or race. I ran Cross Country in high school and the first day of practice was rough, especially if I hadn't done any physical exercise leading up to it. These weren't short sprints and seemed like full marathons at times. But as days went on, I became more and more prepared because of diligently going to practice. By race day I was ready (or so I felt). I had to pace myself during the race but when I saw that finish line, I ran as hard as I could. Some of my fellow runners trained year round and were well prepared, some similar to my fitness level, and there were some that didn't finish the race. Each runner had different strategies for running their race. In the same concept, we know each person's financial plan is different. That's why we evaluate different savings techniques leading up to retirement, as well as distribution strategies, and can help create your plan whether you have been saving for a while or are on the first day of practice.

There are many biblical references that discuss running your race. Hebrews 12:1 states: "Therefore, since we are surrounded by such a great cloud of witnesses, let us throw off everything that hinders and the sin that so easily entangles. And let us run with perseverance the race marked out for us." We each have a race to run in this life. And that race is specific to you and your purpose on this earth. Each day can either be one that helps us make progress in that race or sets us back. Similar to running a race or preparing for the marathon of retirement, we will have good days and bad days. As we practice throwing off any extra hindrances holding us back, we will experience the greatest strides forward in our individual races. 

Evergreen Financial Group is a Fee-Only Financial Planning and Investment Firm located in Billings, MT serving clients in Montana, Wyoming and virtually across the country. Evergreen Financial Group specializes in working with Christian families, including young professionals, Current and Future Retirees and Church Staff Members.