Turning on the retirement income spigot

If you've saved an adequate amount of money to comfortably fund your retirement, you probably think you are in the home stretch. The only thing left to do is sit back and enjoy your nest egg, right? Not so fast. You may still have to navigate some rough waters, so it may not all be smooth sailing.

For one, you will still have to manage your savings to yield the income you desire to finance your lifestyle.

Financial planners favor three main approaches to converting retirement savings into retirement income: probability-based, safety first and using "buckets." A less common strategy involves weighing utility. Click on the tabs to learn about how they work.

Bucket approach

The bucket approach, one that Evensky favors, relies on segregating your money into different buckets based on how soon you will need the money.

Three old red fire buckets © Shelli Jensen/

Your immediate needs are met through withdrawals from a bucket that contains the safest assets, such as a money market account, or bonds that you hold to maturity. The rest of your money gets poured into other buckets that typically contain more aggressive investments, such as stocks, to meet your future needs.

"All of us can think about our money a little bit differently," says Kitces. "One adviser does 30 buckets for 30 years. The other adviser does three buckets -- one for short term, one intermediate, one long term. When I compare the two of them, their actual asset allocation, it's the same portfolio. They've just framed it differently."

Evensky favors a simple two-bucket approach based on what he calls a "five-year mantra." This means he doesn't invest money that people are likely to need in the next five years. The longer-term bucket he invests based on the client's investment policy.

This way, nobody needs to sell securities at the wrong time, he says. "It is immensely cost-efficient because you don't have a lot of moving parts," Evensky says. "And from a behavioral standpoint, it's very powerful because (during the recent market downturn) no one panicked because they knew where the grocery money was coming from."

He finds that tax and transaction costs go up as the number of buckets increases and the need to rebalance the buckets rises. "Instead of making one investment fairly large where the transaction cost is going to be small, you have five smaller, more expensive transactions in the same investment. I think that if you look at those strategies on an after-transaction and tax basis, particularly in a low-return environment, they would fall apart," Evensky says.

In his preferred two-bucket approach, Evensky weighs the transaction costs and taxes against the risk exposure and the desire to take advantage of market momentum.

According to Pfau, while the bucket approach is not necessarily a superior investment strategy, it does have behavioral benefits since people don't panic during stock market declines. However, "It does still rely on having the stock market do well over long periods of time. And if that doesn't happen, it can lead to trouble."


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