Retirement planning: Why bucket strategies don’t protect against sequence risk

In this follow-up, we examine why this is not true.

The main criticism of our earlier analysis was that the withdrawal strategy suffered from a key drawback: We were allegedly withdrawing from equity when the market was down, leading to poor outcomes. Many suggested that a bucket strategy would allow equity to recover after downturns as withdrawals will happen from the debt portfolio. This would permit retirees to maintain higher equity allocations without the adverse effects of sequence risks.

However, in our earlier analysis, withdrawals were made exclusively from the debt allocation. In this respect, our analysis was similar to a bucket strategy: We used the debt bucket as a buffer, giving equities time to recover. The similarity ends there, though.

The difference

An important difference between our previous analysis and a typical bucket strategy is that we used a monthly portfolio rebalancing, whereas in a bucket strategy, there are decision rules regarding when to rebalance. Typically, rebalancing in a bucket strategy is done when the equity portfolio is sitting on gains.

To test whether the decision rule-based rebalancing of a bucket strategy is superior to simple periodic rebalancing, either monthly or annual, we can compare the safe withdrawal rates obtained under both methods.

As is evident from the data, the safe withdrawal rates obtained under the bucket strategy are lower than for the periodic rebalancing method. This is not surprising at all—definitely not for those familiar with retirement planning.

Simple periodic rebalancing strategies outperform bucket strategies because they not only avoid selling equity at market bottoms but also actively buy equity when valuations are low. This is a critical strength that traditional bucket strategies fail to exploit.

Rebalancing in bucket strategies is a one-way street: You rebalance from equity to debt when the equity portfolio is sitting on gains. You miss out on the reverse: Rebalancing from debt to equity when equity is down, which happens automatically in a periodic rebalancing strategy.

If you are now going to argue that we can implement a two-way rebalancing between equity and debt in a bucket strategy as well, then it will no longer remain a bucket strategy but will morph into a periodic rebalancing strategy!

If the goal is to avoid selling equity in downturns, that can be achieved more elegantly—and efficiently—by following a rule-based rebalancing approach, with withdrawals targeted from debt or low-volatility assets. A well-rebalanced portfolio already does most of what buckets claim to do—and often, better.

The reason you may want to use a bucket strategy is not because it has an edge in delivering higher withdrawals, but because it can provide emotional comfort. Retirees often engage in mental accounting: Viewing their savings as separate “buckets” for near-term and long-term needs. This can reduce panic during equity drawdowns.

However, using a bucket strategy under the illusion that it reduces sequence risk—and therefore justifies a higher equity allocation—can be misleading, if not outright dangerous. Don’t just take my word for it. Harold Evensky, widely regarded as the “Father of the Bucket Strategy”, has been clear: The bucket approach is not a tool for boosting returns, but rather a form of behavioural insurance—designed to help investors sleep better at night, not retire richer.

Ravi Saraogi is a CFA, Sebi-registered investment adviser, and a co-founder of Samasthiti Advisors.