Book Excerpt: Buckets and Your Retirement Paycheck

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My second book, Can I Retire Yet? — How to Make the Biggest Financial Decision of the Rest of Your Life, is coming soon. It should be available on Amazon, in paperback and Kindle, in just a few weeks. To celebrate, I’m publishing another excerpt here on the blog.

The new book takes a comprehensive look at the retirement question, from both a financial and personal perspective. In it you’ll find coverage on every topic from living costs to health care, inflation, taxes, Social Security, investing, annuities, withdrawal strategies, retirement calculators, stock market cycles, and backup plans.

On the blog this week we’ll take a few pages from the book to look at the practical matter of how you should manage your retirement cash flow….

A Retirement Paycheck

Once you’ve decided where the cash for retirement living expenses is to come from, how to do you actually dole it out to yourself on a monthly basis?

Look to your own personal organizational style. Mine is ad hoc: Once or twice a year, when I need money, I sell some of our most appreciated assets for income. And I track all our expenses in Quicken. Weekly, I enter receipts and bills and reconcile statements. So, I always know within a few dollars how we are doing against our budget, and can make course corrections if needed. Tracking as we go works well for us, since our accounts are fully automated.

Some people are more comfortable with a “paycheck” model for managing their spending. In this approach, you decide on the annual amount you can withdraw, then set up a monthly mechanism (ideally, at no charge) to have assets sold and the proceeds transferred into your checking account for regular expenses.

You then “save” unused amounts from this account for major irregular or unexpected expenses. Since you have the money in an account somewhere anyway, there is no real financial need for this approach – it’s simply a bookkeeping mechanism. But, it may be the simplest and safest way for many.

As for the actual accounts, we keep our main checking at USAA, essentially an online bank. The majority of our investments are at Vanguard and Schwab (where I keep another checking account). I wouldn’t fault anybody for consolidating everything at one institution, for simplicity. But I like spreading the responsibility around, so I always have a functional account if there is fraud or a computer glitch.

In short, there is no right or wrong way to manage your retirement cash flow. The key thing is living to a budget, in one form or another, and implementing it in a way that suits you, and your spouse.


Some financial advisors push the idea of buckets as a solution to the retirement cash management problem. The concept has intuitive appeal: You segregate your retirement assets into several categories or “buckets” according to their volatility, and when you’ll need them. So you have a short-term bucket of cash, a medium-term bucket of bonds, and a long-term bucket of stocks.

This sounds sophisticated, logical, and reassuring to clients. But, it’s really just a different lens for viewing a traditional asset allocation: Is there really any difference between saying you have 10% cash and 30% bonds in your asset allocation, versus saying you have a 10% short-term “bucket” and a 30% medium-term “bucket”?

In theory with this approach, there is some systematic method for moving assets between buckets, so that you always have a cash reserve and never have to sell stocks at a loss. But, the decisions about when to sell equity assets to replenish cash and bond buckets are the same as for other strategies, and just as difficult.

At least two prominent researchers (Jim Otar and Moshe Milevsky) have analyzed the buckets strategy and found that no systematic method exists! In most cases, the strategy simply dissolves into a kind of lopsided total returns approach, which would have withdrawn from all asset classes equally.

If not careful, over time you wind up with most of your money in the riskier asset. The end result is that you over perform, or under perform, a total returns approach – depending on market conditions. At best, on average, the performance is about the same.

My own research also confirms that cash/bond buckets are overrated. Refilling buckets reduces to the usual problem: When and how to sell equity assets. Rather than stockpiling asset classes in buckets, it may be just as effective to simply sell whichever one — stocks or bonds — is in favor, as needed.

Personally, though, I will probably always keep at least a year of cash living expenses on hand in retirement. In a crisis, there is no substitute for liquidity!

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