Three Bucket Retirement Strategy

Finally, you are retired and you are planning to withdraw 4% from your portfolio every year according to plan. To make our retirement plan a 101%-sure success rate, you need a three-bucket strategy in place!

The Trinity Study has shown that everything is going to be fine if I hold the correct allocation of bonds and stocks in my portfolio.

Due to my ‘kiasu’,‘kiasi’ mentality, and making sure my retirement plan won’t fail me, I need a back-up plan!

Imagine your retirement date is fixed on the date 1-2 months just before the 2008-2009 subprime crisis.

You are happy for a few months after retirement and later is in shock seeing your portfolio drops 50.4% within months.

This might shatter your belief that “Is happy and peaceful retirement possible?”

I am not asking you to have a backup plan to get a second marriage after retirement. So please don’t get me wrong!

First decade post retirement is crucial

It will be very unfortunate for you to witness a bear market within 1-2 years after retirement. One definition of a bear market says markets are in bear territory when stocks, on average, fall at least 20% off their high.

Besides the recent bear market in March 2020 due to the Covid-19 pandemic, between 1926 and 2017, there have been eight bear markets.

These bear markets lasted from six months to 2.8 years, and in severity from an 83.4% drop in the S&P 500 to a decline of 21.8%, according to an analysis by First Trust Advisors based on data from Morningstar Inc.

The Stock Market Crash of 1929 was the worst-case scenario because it lasted 2.8 years and sliced 83.4% off the value of the S&P 500.

It will be a disaster to encounter a market crash resembles The 1929 Great Depression after your retirement but mind you that crash only lasted 2.8 years.

Therefore if you have enough savings that can last 2-3 years of your annual expenditure, you would ride through even the worst storm ( based on historical data, not necessarily hold true in future) and be OK after 2.8 years!

Three bucket strategy

Remember the first principle in ETFs and index funds investing,

” When the market crashes, selling is not an option!”

Selling your hard-earned retirement assets in a bear market means that you’re selling low. At the end of the day, you’ll have fewer assets in the portfolio to increase in value when the bear market ends.

Selling assets during market sell-off would make you part of the statistics of the 3-4% of investors who use up their savings before 30 years even though they practice the 4% safe withdrawal rate.

If this unfortunate event happens during the first decade after your retirement, extra cash is needed to weather the storm. Therefore, you need this three-bucket strategy to be sure you are 101% safe!

You need to have,

• Bucket 1 : A total of 2 years of expenditure in cash

• Bucket 2: Your portfolio that consists of 7-8 years of high quality bonds ETFs/ Index funds.

• Bucket 3: The remaining amount of portfolio in equities.

To illustrate this, if you need USD40k per year after retirement, according to The Trinity Study, USD1 million is the amount you need in your retirement portfolio. Your egg nest should be split to USD320k into bonds and the remaining USD680K should be invested in equities. ( About 30-40% bonds and 60-70% equities)

The cash in bucket 1 is a separate account. Besides your USD 1 million portfolios, you have to keep an extra USD80k in bucket 1!

You need 10 year expenditure in safe assets

By keeping your assets in these three buckets, it effectively provides you a total of 10 years less risky assets to live off. Even in a serious market downturn, you would not sell your equities but live on cash reserve as well as your bonds holdings.

Remember selling during market crashes will dry up your portfolio and eventually your retirement plan would fail badly.

Bucket 1 is your backup plan in case of market crashes during the first decade of your retirement.

Another extra handle maybe?

For me, three bucket retirement strategy is still not a perfect plan. I need an extra handle to carry these three buckets steadily and safely.

Yes- you are right! Another source of passive income after retirement is what the extra handle is!

Income from your extra rental properties or REITs would be the extra bucket handle you need !

Oh yes, pocket money from your children would be an added bonus!( Yes, Asian’s children still give their parents money if they can!)

Conclusion

You have to follow this three-bucket retirement strategy to smoothen the retirement journey.

But an extra bucket handle might a good idea to bulletproof your retirement plan!