Advisors favor underutilized strategies over asset buckets

Is it time for financial advisors to kick the bucket strategy?

In the decades since financial planning guru Harold Evensky first outlined the concept of segmenting assets into different “buckets,” financial advisors and clients alike have gravitated toward the strategy, in part for the psychological benefit it provides — creating distinct pools of money that can shield retirees against short-term market fluctuations.

But advisors say the popular strategy has drawbacks, and there are alternatives that may work better.

“Conceptually, it can be helpful to clients, but it isn’t that practical,” said Charles Kyle Harper, founder of Harper Financial Planning in West Columbia, South Carolina. “When implemented, the advisor and client have to decide when to reallocate between the buckets.”

In practice, advisors say the mechanics of refilling buckets can quickly become “clunky” as imperfect, human decision-making takes over.

READ MORE: Should clients in the ‘retirement red zone’ reconsider withdrawal strategies?

“Too often, this becomes a market timing decision because clients are hesitant to move money when the market is down out of fear of locking in losses,” Harper said. “Alternatively, I’ve found they find it difficult to pull dollars out of more aggressive buckets to allocate to more conservative ones when everything is going well.”

Scheduling bucket rebalancing on fixed intervals can help eliminate much of that downside, but taking that approach quickly transforms the bucket method into a total return strategy, where a set asset allocation is rebalanced based on drift, Harper said.

Keith Fenstad, vice president and director of wealth planning at Tanglewood Total Wealth Management in Houston, Texas, said that his firm prefers to take a more streamlined approach.

“To us, it’s a one-bucket strategy, and we’re rebalancing in and we’re rebalancing out, and then we’re not stuck with the potential of having to dip into our most aggressive bucket if we spent down these other two,” Fenstad said. “Because, to us, at the end of the day, you pull all those buckets together, you still have an asset allocation that you’re working with. So we just kind of think of it more on that higher level.”

Despite their own objections to the approach, some advisors say they still use the bucket approach for their more anxiety-prone clients.

READ MORE: As life expectancy rises, retirement strategies lag

“It’s most effective for clients who are anxious about market volatility or need mental guardrails to avoid emotional selling,” said Daniel Milks, co-founder and operations officer of Woodmark Wealth Management in Greenville, South Carolina. “It gives them permission to leave long-term investments untouched because they know their short-term cash is safe.”

“I like the bucket strategy as a communication tool more than a strict drawdown formula. It helps clients visualize their retirement in terms of short-, medium- and long-term needs, which is incredibly useful for setting expectations and reducing panic during market dips,” Milks added.

Advisors point to bucketing alternatives

Still, Evensky’s bucket strategy is far from the only approach that can offer clients a useful mental framework. Guardrails-based withdrawal strategies, for instance, allow for highly adaptive withdrawal approaches, but are often underutilized in the industry, Milks said.

A notable example of the guardrails framework is the Guyton-Klinger strategy. 

This approach begins with selecting an initial portfolio withdrawal rate. If market returns are strong and the withdrawal rate drops 20% below the initial level, withdrawals are increased by 10%, offering more income than a static withdrawal strategy. During periods of weak market performance, the inverse adjustments occur to help preserve the portfolio.

Unlike static strategies that rely on fixed withdrawal amounts, this method provides a clear framework for adjusting spending, ensuring retirees neither overspend nor underspend. But it, too, isn’t without its critics.

“Guyton-Klinger guardrails have several serious shortcomings,” Derek Tharp, lead researcher at Kitces.com, and Justin Fitzpatrick, co-founder of financial planning software Income Lab, wrote last March.

READ MORE: Social Security quietly backtracks on 100% clawback plan

“This method can result in sharp reductions in retirement income that would be unfeasible for some retirees,” the two wrote. “Additionally, these income reductions tend to overcorrect for market losses, meaning that far more capital is often preserved than necessary at the cost of severe reductions in the retiree’s standard of living.”

Other approaches can help provide the same psychological benefit as the bucketing method. The income floor strategy, for example, works by creating a stable income “floor” using sources like Social Security, pensions and annuities. It allows advisors to be much more aggressive with the remaining assets without putting the client at risk of not being able to pay for a baseline of expenses.

This more aggressive approach can be beneficial on paper, but presents its own challenges for advisors explaining the framework to their clients, Harper said.

“Typically, the client who wants a guaranteed income floor is not the same one who can stomach large amounts of volatility,” Harper said. “Mathematically, it is a good option, but behaviorally, it isn’t as practical.”