Bucketing: It's in Your Head (in a Good Way)
The practice of segmenting a retirement portfolio by time horizon can help ease key retiree worries.
Bucketing your retirement portfolio--or segmenting it by time horizon--won't necessarily yield the very best investment result, as financial-planning guru Michael Kitces argued in this video. (Here's a model portfolio that uses the bucket approach.)
Most bucket frameworks call for keeping near-term income needs in cash. But if the cash component of the portfolio--bucket 1 in most bucket constructs--is too large, it can drag on the portfolio's returns. The opportunity cost of holding too much cash is particularly high right now, given how low certificate of deposit and money market yields are. Simply maintaining a total-return portfolio, consisting of bonds and stocks, then periodically peeling off living expenses from either asset class when rebalancing will tend to generate a higher return than a portfolio with a dedicated cash bucket. Underperforming a pure stock/bond portfolio is a particular problem for retired people who like to keep their cash cushions large--holding more than one or two years' worth of living expenses.