The major benefit of this approach is that you have more control over when you sell investments and can potentially grow your investment account balance over time. If both stocks and bonds are down, you continue to draw from your savings. When you refill your savings account, you do so either by selling stocks if the market is up or selling your fixed income securities if they’ve performed well. This enables you to avoid selling assets at a loss. With this approach you draw from your savings account to cover your expenses and refill that “bucket” with money from the other two. Fixed-income securities, including government and corporate bonds or certificates of deposit.A savings account that holds approximately three to five years’ worth of living expenses in cash.When you implement a buckets strategy, you have three separate sources of retirement income: And if your investment gains don’t keep pace with inflation, you could see your buying power fall. This again makes it difficult to create a financial plan. Your income will also vary from year to year, depending on market performance. Unfortunately, your nest egg needs to be quite large to provide enough income for you to live on. The major benefit of this approach is that you cannot run out of money in your retirement account. You withdraw only the income your investments produce from interest or dividends. Systematic withdrawals leave your principal invested throughout the entirety of your retirement. If you followed this withdrawal schedule and your investment account earned an average 3% annual return throughout your retirement, your balance at the end of 20 years would be approximately $243,518. The chart below shows the income that would be available to you over a 20-year retirement if you were to retire with $500,000 in 2020 and follow the 4% rule (assuming a 2% inflation rate). This rule also doesn’t provide flexibility to adjust based on the performance of your investments. However, with rising interest rates and increased market volatility, there’s a risk you could run out of money using this approach. The major benefit of the 4% rule is that it’s a simple approach and you're buying power keeps pace with inflation. If there’s 2% inflation (which is the Federal Reserve’s target rate of inflation), you would withdraw $20,400 the following year. If you follow the 4% rule and begin retirement with a nest egg of $500,000, you would withdraw $20,000 during your first year of retirement. Each year, you’ll increase the amount to keep pace with inflation, the rising cost of goods and services. If you follow the 4% rule, you’ll withdraw 4% of your investment account balance in your first year of retirement.
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