Drawdown strategy

The two-bucket strategy explained

The two-bucket approach does not try to earn more. It tries to make sure you never have to sell a growth asset at the wrong moment.

A bucket strategy divides a retirement corpus by the job each part has to do. A near-term income bucket holds several years of spending in safe, accessible holdings and is where every withdrawal comes from. A longer-term growth bucket holds the rest, stays invested for growth, and periodically refills the first.

The purpose is narrow and worth stating precisely: it is not a way to earn a higher return. Splitting a portfolio and putting part of it in low-return assets will, on average, lower the total return. It is a way to avoid being forced to sell growth assets during a downturn, which is the mechanism behind sequence-of-returns risk.

How a year runs

The RetirePeace 2-Bucket Calculator models the following sequence, in this order:

1. The year’s inflation-adjusted income is withdrawn from Bucket 1.
2. Any one-time withdrawal you have scheduled is also taken from Bucket 1; if Bucket 1 cannot cover it, the shortfall is pulled from Bucket 2.
3. Each bucket grows at its own return, independently.
4. If Bucket 1 has fallen below the refill trigger, money is transferred from Bucket 2 until Bucket 1 reaches the refill target, or until Bucket 2 runs out.
5. The closing balances become next year’s opening balances.

The refill is the mechanism that makes the structure work, and it is also where the design decisions live.

Trigger and target

• The refill trigger is how low Bucket 1 may fall, measured in years of withdrawals, before a top-up happens. A trigger of 2 means "refill once fewer than two years of spending remain".
• The refill target is how many years of withdrawals Bucket 1 is topped back up to.

The gap between the two settings determines how often transfers happen. A trigger of 2 with a target of 5 means large, infrequent transfers; a trigger of 4 with a target of 5 means small, frequent ones. Neither is obviously better, and the trade-off is real: a large income bucket buys more protection but keeps more money out of growth assets for longer, which costs return over a long retirement.

Comparing it against a single pot

The most useful thing you can do with this calculator is not to run it alone. Run the same corpus, the same withdrawal and the same escalation through the SWP Calculator as a single pot, and compare.

Under a constant, smooth return, which is what both calculators apply, the two-bucket structure will usually end up slightly behind the single pot, because part of the money sat in the lower-return bucket the whole time. That result is correct and worth seeing, because it makes the trade-off explicit: the two-bucket approach buys protection against a risk that a smooth-return model does not simulate, and the model does show you the price of that protection.

Anyone claiming a bucket strategy simply produces more money is either modelling a volatile return path or not modelling carefully. The genuine case for buckets is structural and behavioural, not arithmetic.

Where it helps

• Early-retirement downturns. Several years of spending already set aside means a bad first few years can be waited out instead of sold into.
• Decision-making under stress. A rule that says where this month’s income comes from is worth a great deal when markets are falling and the temptation to react is strongest.
• Clarity. "Five years of spending is safe" is a far easier thing to hold on to than a percentage allocation.

Where it does not

• It does not fix an unaffordable withdrawal rate. If the income is too large for the corpus, buckets change when the failure happens, not whether. Check the rate first. See how long a retirement corpus lasts.
• It costs return in good markets. Money held in the income bucket is money not compounding.
• It can be an allocation in disguise. Two buckets with a set refill rule is, at portfolio level, close to a fixed allocation with periodic rebalancing. If that framing suits you better, you may not need the extra structure.
• Tax and transaction costs are not modelled. Refills are free transfers in the model; in reality they may be taxable events.

A sensible way to use the calculator

1. Start with a Bucket 1 allocation covering three to five years of spending.
2. Set Bucket 1’s return to something genuinely safe, and Bucket 2’s to your realistic long-term growth assumption. Setting Bucket 1 too high is the most common way to make this model flatter itself.
3. Run the same scenario in the SWP Calculator and compare the total remaining corpus.
4. Then vary the trigger and target, and watch how much of the corpus ends up sitting in the low-return bucket over the plan. That is the price of the insurance, and it is the figure worth knowing before committing to the approach.

This guide is educational and general. It is not financial, investment, tax or legal advice, and it takes no account of your circumstances. Every figure quoted is an illustration produced by the arithmetic described, not a forecast or a guarantee. Investment returns, inflation and market conditions are uncertain and will differ from any assumption used here. See the full disclaimer.