Retirement Income

Creating retirement income with buckets of money

Creating retirement income with buckets of money

Interest rates have played a big role in changing the retirement landscape. I’ve always said, the best time to retire was back in 1981 when interest rates were at the peak. If you retired back then, you could take all of the money you saved and plunk it into a good old-fashioned GIC and earn 12% to 21%. If you think about it, most retirees could easily live off the interest and keep their capital 100% secured. Unfortunately, those good old days are long gone.

Since 1981, we have seen a massive decline in interest rates and today retirees can get 1%, 2% or 3% if they really shop around. It’s tough now for the retiree to live on less than 3% interest in a safe environment. So instead of low returns in a safe environment, most investors have moved money to riskier places in a quest to do better. If you think about it, this has created a new set of problems for the retiree or the soon-to-be-retiree.

How many of you know people who delayed their retirement because of the stock market and what a correction did to their portfolio? How many of you know people who retired but then had to go back to work because a stock market correction caused them to lose too much money?

Variable returns can work against you

One of the problems of return projections in the financial industry is that most of the math is modeled on a straight line. For example, the math on a 7% average return really assumes that you make 7% per year each and every year.

The real problem is most portfolios don’t move in a straight line anymore. Instead the move up and down with peaks and valleys. What if you did the math of withdrawing income on and investments that fluctuates with variable returns as opposed to an investment that moved in the path of a straight line? Would the results be different?

Read this article showing the results of the math.

Avoiding the risk of bad timing.

One of the new risks that retirees face is the risk of bad timing. What happens if you retire just as the market is correcting? What happens if you retire and then the market corrects shortly thereafter? Some have coined this the retirement risk zone.

To prevent yourself from changing your timing of retirement because of something you can’t control or predict, you can use the bucket strategy to creating retirement income.

What is the bucket strategy to retirement income?

Basically what you do is set up your investments in hypothetical buckets like in the diagram. In one bucket you fill it with investments that are safe so that you can pay your self the necessary income you need from your portfolio for at least 5 years. Then you fill another bucket with investments that might be a little riskier but with a time frame of 5 to 10 years in mind. This might include some fixed income investments or even some income paying investments like REITS or Blue Chip Dividend paying investments.. The last bucket might contain some riskier investments to help combat inflation over the long run.

When the short-term bucket drains down because of income to the retiree, then you can fill it up with the next bucket. And then the 5 to 10 year bucket drains down, you can fill it up with the last bucket. In theory, the older you get, the more conservative your portfolio becomes.

The main idea of the bucket strategy is that short-term volatility in the markets does not affect your ability to create income in the short term. The bucket strategy can take away some of the stress of market swings.

What do you think of the bucket approach to creating safe retirement income?


  1. Sandy

    That first paragraph is a bit funny because those same retirees were actually making money off of me when our mortgage way back in 1981 was sitting at 19.25% (second mortgage) and 11.75% (first). Now that our house is payed off, I envy the great mortgage rates of today. Although I doubt I could afford my house if I had to buy it today.

    Recent returns in the stock market have flat-lined my RRSP investments. But it should turn around just like we came out of recessions in the 80’s and 90’s and also survived the tech collapse in the early 2000’s. Cycles are inevitable. Too bad we couldn’t predict the highs and lows. Thanks for the advice.

  2. My Own Advisor

    Great post.

    I’m looking at a similar strategy for my retirement plan, layering my income.

    Pension = first layer, along with CPP and OAS.

    Bond ETFs = in registered accounts is the second layer.

    Dividend-paying stocks and REITs = third layer.

    I hope to be able to live off the first layer for all daily living expenses.

  3. Michael James

    Hi Jim,

    Wasn’t inflation very high back in 1981? If you think in real terms, then the capital was not 100% secured at all. After inflation and taxes, GIC investors were probably still a little better off in 1981 than they are now, but not by as much as it seems. And this only applies if they saved some of the interest to cover inflation. If they spent all of their interest in 1981, then they were depleting their capital quickly.

    • Early Financial Freedom

      I was about to comment on the same point then I saw your comment. Inflation was 11.22% in 1979, 13.58% in 1980, 10.85% in 1981. Saving rates tell only half of the story.

  4. Michael Nuschke

    Like the box approach but of course it is not fail safe. I.e. US markets were recently at the level they were 13 years ago. Given the extreme nature of debt ridden developed economies, using past rate of return on asset classes as a guide has some uncertainties.

    Like the idea of continuing to add to guaranteed income base as possible until that covers basic lifestyle expenses…then you have less pressure on timing of returns on the remainder.

    I use a model with “3 Baskets” : Guaranteed, Balanced Portfolio, Alternative.


  5. Wayne

    The bucket approach sounds great – and is a way of evening out withdrawal risk – but it doesn’t really work the way most people think.

    Let’s say you spend five years draining the safe investments bucket. You then cash your 5 to 10 year bucket and move the proceeds to the safe bucket. And then collapse five years from the 10 year plus bucket. Sounds good? But you really did not need to touch your 5 to 10 year bucket. You realize that moving a 5 year chunk from the risky bucket to the safe bucket is simpler. But the markets just took a big hit, so you do not want to cash your riskier stuff. You are now cash starved. So you figure that you should make the movements on a monthly basis so you can average the impact of market changes (which effectively drives the whole mechanism). But then you realize that you are just living off withdrawals from the risky bucket. And that the really clever system so many Financial Advisers tout is really pretty dumb!

  6. Vince McHugh

    Another though provoking article.

    What strategy would you apply if the amount of dividends, from Canadian blue chip companies, along with a company pension was more than enough to cover your living expenses?

    As dividends may not continue as expected, inflation and longevity may impede a plan. Do you have any thought as to a contingency plan?

    Thank you

Leave a reply

Your email address will not be published. Required fields are marked*