Bucket Strategy and System Withdrawal: Understanding the Difference

There are many different strategies that can be used to generate retirement income. But the two biggest ones are the system exit method and the bucket method.

Key points

  • Saving for retirement is a common goal, but once retirement is achieved, it is equally important to withdraw these funds in the right way.
  • Bucket divides funds in different time frames or risk tolerance ranges to maintain a withdrawal rate corresponding to the remaining time after retirement.
  • Systematic withdrawal advocates maintaining a fully diversified investment portfolio, which can generate withdrawal rates of 4% to 5% per year.


The bucket or split strategy divides the asset into different “buckets”, depending on the remaining time before withdrawal and the customer’s risk appetite. For example, the first bucket may contain cash and cash equivalents needed for the next five years, while the last bucket may contain riskier stocks that do not have to be sold for ten years or more.

These buckets can be rebalanced at any time to reflect changes in income requirements or risk tolerance.

System exit

In contrast, the basic principle of the system withdrawal method is that you invest in a wide range of asset classes and withdraw proportionally every month.

In other words, it treats all of the customer’s assets equally and subtracts the required income from the total income. Over time, the fully diversified investment portfolio is periodically rebalanced to cope with these regular withdrawals. Only one asset allocation target needs to be maintained, and the annual withdrawal rate of 4% to 5% is predictable.

Psychological difference

Financial advisors prefer to use a systematic exit strategy because it is a more maintainable and predictable strategy in the long run. Unfortunately, when the market experiences a sharp decline or adjustment, it is difficult for some customers to use these types of strategies. They may see a downward trend in the total value of their retirement accounts and become worried, which may lead to risk aversion and decision-making errors.

The bucket strategy is an excellent way to alleviate these concerns. Since short-term investments are held in cash or other liquid securities, the same market downturn may only affect long-term “buckets” that customers may not care about because they need to allocate a long time span. These psychological benefits can prevent decisions made due to panic, thereby saving a lot of money.

These tendencies stem from the so-called partial fallacies and cognitive biases of psychological accounting that are common in finance. For example, people tend to spend more on credit cards than cash. Somehow, the expenditure doesn’t feel so real.

Similarly, customers may have exactly the same amount in the same investment, but dividing accounts into different labels can encourage them to take different degrees of risk.

Distribution similarity

On the surface, bucket and system withdrawal strategies may look very different, but when looking at portfolio allocation and performance (independent of customer behavior), they may be very similar. According to the analysis of Principal Financial Group, Inc. (PFG), customers may feel safer about the bucket strategy, but apart from a systematic withdrawal strategy, it may not provide financial benefits because it is less complicated to manage.

Although different bucket portfolio allocation strategies can be used in different situations, the bucket strategy usually produces an asset allocation that is basically similar to the system withdrawal strategy. For example, a customer may have 60% of assets in the first few barrels of cash and short-term bonds, and 40% of assets in the latter few barrels of higher-risk stocks and high-yield bonds. All of these are very similar to the 60/40 income/growth system distribution.

In either case, the key to financial advisors is to ensure that asset allocation is very suitable for individual clients. Those who are willing to take more risks have more weight in stocks, while those who are unwilling to take risks may have more weight in bonds, annuities, or cash equivalents.

Obviously, the customer’s time horizon also plays an important role in establishing these same parameters.

Implementation challenges

In terms of the psychological benefits of customers, the bucket strategy is very successful, but there are some challenges in the implementation process. Generally speaking, there is a lack of standardized tools to calculate cross-bucket allocation. There are some frameworks used throughout the industry to help guide their creation, but there is no gold standard that everyone expects to make things easier.

Portfolio reporting software may also encounter problems when using bucket strategies, as these programs usually report aggregated or account-by-account investments. Although setting up separate accounts for each bucket may work in some cases, the cost of doing so may be too high, and the mix of certain retirement accounts and taxable accounts may cause problems for consultants. Without the right tools to ensure proper distribution, rebalancing can also pose challenges.

Bottom line

Bucket strategy and system exit strategy are similar in theory, because the asset allocation between these two options is often very similar. In other words, due to the influence of partial fallacies and investor cognitive biases, these two strategies have very practical differences in practice. Compared with the traditional system strategy, the bucket strategy usually allows customers to be more adaptable to market downturns and appropriate risk-taking.

For financial advisors, the key decision to make is whether the additional cost and complexity associated with the bucket strategy are worth the psychological benefits for the client. This may depend on many factors, such as the customer’s historical risk aversion and the consultant’s own comfort in maintaining these types of investment portfolios. Finally, these two strategies have their own advantages and disadvantages, which must be considered before implementation.


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