The Bucket Strategy

Another method of determining how much you need is determined by using what's known as a bucket withdrawal scheme. In this scheme after you have decided how much you need to spend each year (your 1x) you keep the amount needed for the immediate future (say 1-5 years) in highly liquid instruments (like cash, FD etc) and the amounts needed for the next few years (say 5-15) in a debt heavy portfolio - for example a 30:70 equity:debt portfolio and then the amounts needed even later (say years 15-30) in a equity heavy portfolio - for example 70:30 equity:debt and rebalance periodically. Of course, you need to account for inflation, and also use realistic values for the returns from the debt and equity instruments.

In both SWR and Bucket strategies above, periodic rebalancing to maintain the target asset allocation ratios is key to ensuring your portfolio doesn’t prematurely run out. This is because equities are the only asset class that can give returns well above inflation.

Interestingly, the end result of both strategies when it comes to the overall asset allocation ratio is remarkably similar as Michael Kitces (a highly-respected expert in retirement finances) explains.