3. A "bucket" strategy
For retirees who are nervous about having to sell investments in a down market, a ‘bucket’ strategy can be useful. With this method, the retiree sets aside a cash-like ‘bucket’ of money to cover their expenses in the short term (perhaps two to three years) and allows the rest of their assets to be invested. In this way, the retiree will not have to sell invested assets to fund their lifestyle (until the short-term ‘bucket’ runs out) or be tempted to move their assets to cash in a downturn.
However, a simple rebalancing has been shown to be a potentially superior strategy (in part by ensuring that liquidations come from asset classes that are up the most in value, similar to what bucket strategies are intended to accomplish).
4. Variable income strategy
With a variable retirement income strategy, retirees plan to spend different amounts of income in the various stages of retirement. For example, research from David Blanchett demonstrated a ‘spending smile’, with inflation-adjusted spending among retirees declining throughout most of retirement, only increasing in their final years. Using a variable strategy could allow retirees to spend more in their early years, while saving for potential healthcare costs in their later years.
However, some retirees might resist declines in real spending throughout the middle part of their retirement.
We will discuss the last 2 strategies here.