Allowing advisors or individual investors to be opportunistic about how they replenish their cash bucket could also help detach them from an “unhealthy mindset where the focus is all on income production,” said Benz.
But the bucket system does come with several disadvantages – one is that it does not establish a sustainable system or percentage for withdrawals. A bucket system will not salvage a plan in a retiree’s withdrawal rate is too high.
For individual investors, the bucket system might be dangerous because it does require maintenance and some kind of system for replenishing the cash bucket.
The bucket system also does little to address asset location, said Benz.
“Many retirees are bringing in multiple accounts to retirement: taxable, tax-deferred and Roth accounts, and there may be multiple accounts belonging to two spouses,” said Benz. She argues that financial professionals, as well as individual investors, should seek to simplify their holdings, even if they cannot consolidate their accounts.
The three-bucket system she proposes, as well as the two-bucket approach favored by Evensky, also may result in a large allocation to cash within a retiree’s portfolio. In an upward-trending market, especially one where bonds are experiencing price appreciation, having a large cash bucket will be a drag on investment returns.
Like almost any other retirement distribution strategy, the success rate of a bucketed portfolio will depend on the investor’s withdrawal rate and market performance, particularly early in retirement. Given depressed yields and low returns on most fixed income instruments and relatively high valuations in stocks, Benz warns that the bucket strategy needs to be carefully monitored, adjusted – and that the portfolio components should be periodically rebalanced.
In fact, periodic rebalancing can be used to partially or fully replenish an investor’s cash bucket, said Benz.
"We have to consider our maintenance approach for this kind of portfolio," she said. "How often are we taking a look and thinking about refilling bucket one? How often will rebalancing occur logistically? How will it occur logisticaly? We're not just looking at asset class exposures, but individual securities withint he buckets where valuations may be lofty and using rebalancing those securities as tools for managing the system."