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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’ll need to create a steady income throughout retirement. That’s where retirement withdrawal strategies come into play. Spending your savings without the checks and balances of a proper plan could leave you in a situation many retirees dread – running out of savings. In fact, 37% of today’s retirees are most afraid of running out of savings in retirement, while 23% fear they won’t be able to meet the basic financial needs of their family.1

There are two popular withdrawal strategies: systematic withdrawal and the bucket approach. Below you’ll learn about both these approaches, but a financial planner can help you decide what works best for you.

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 as one composite portfolio of savings 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 to your target as you draw from various underlying investments (i.e.: mutual funds and other sub-accounts).

Based on a well-known 1994 study conducted by Bill P. Begen, the ideal amount to withdraw is 4% – 5% of a retiree’s investments per year.2 But keep in mind that every situation is different, and your ideal withdrawal rate might be higher or lower. This study continues to be discussed and evaluated, like in this recent article by the author challenging another article’s commentary. Speak with your financial planner to determine what’s best for you and your family.

What Is the Bucket Approach?

The bucket strategy puts your wealth into categories (or “buckets”) based on certain criteria. The most common type of bucket approach is time-based. In this type of approach, each category represents a time period in retirement. These are generally broken down into five-year periods, meaning the buckets represent the first 5 years, 10 years out, 15 years further, and so on.

How the buckets are segmented 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 most-risky.

For example, picture three buckets representing 15 years in retirement. The first bucket, the one 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 five 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 15 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 like they’re all about the numbers, taking in the psychological considerations of each approach can help you and your financial planner determine which option is best for you.

In general, people find that the bucket approach is an easier concept to digest. Your assets are organized, and it can make it simpler to align with certain financial goals throughout retirement. Additionally, the bucket strategy can offer more reassurance during market volatility, as the “long-term” buckets are the ones affected, rather than the entire retirement account.

People may find the systematic approach more overwhelming, as they’re dealing with their retirement accounts and investments in their entirety. A lot can depend on how well your advisor communicates the strategy and you understand the approach. The systematic approach can make your taxes and finances simpler and more efficient. It can be an extremely useful and effective withdrawal strategy.

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’s imperative that you put a plan into place. Doing so will help prevent headaches and financial distress later down the line, which is something no one wants as they’re enjoying retirement.

 

https://www.transamericacenter.org/docs/default-source/retirees survey/tcrs2018_sr_retirees_survey_financially_faring.pdf

http://www.retailinvestor.org/pdf/Bengen1.pdf

This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.