The Both/And Distribution Strategy: Integrating Buckets with the 4% Rule
Series: S3 Retirement Distribution Mastery (Part 2 of 3)
Read Part 1: Surviving the Descent: Why Retirement Distribution Requires a New Mindset
In the financial world, there is a constant debate about the "best" way to take income. One camp shouts about the 4% Rule (withdraw a steady percentage adjusted for inflation). The other camp champions the Bucket Approach (segmenting money by time).
Retirees are often left confused, feeling like they have to choose between a rigid mathematical rule and a complicated system of accounts.
At SafeSimpleSound, we apply the principle of Integration Over Abandonment. We don't throw out the 4% rule, nor do we blindly follow it. We integrate it with Time-Segmentation (Bucketing) to create a Simple, robust system that works in the real world.
The 4% Rule: A Sound Guideline, Not a Law of Physics
The 4% Rule is a fantastic starting point. It suggests that if you have a balanced portfolio, you can withdraw 4% in year one, adjust for inflation annually, and likely not run out of money for 30 years.
However, the 4% rule assumes you are a robot. It assumes that when the market drops 30%, you will calmly sell your stocks to get your cash. In reality, selling stocks when the market is down is physically painful and financially destructive. It violates our Safe principles.
The Bucket Approach: Why Segmenting Time Creates Psychological Safety
This is where the Bucket Approach enters. Instead of viewing your money as one big pile, we view it as three distinct buckets of time:
- Bucket 1 (Now): Cash and equivalents for the next 1-2 years of spending.
- Bucket 2 (Soon): Bonds and dividends for years 3-10.
- Bucket 3 (Later): Growth stocks for years 10+.
By segmenting your money this way, you are buying patience. If the market crashes today, you don't care. Your spending money for the next two years is already in Bucket 1 (Cash). You don't have to sell the stocks in Bucket 3. You can wait for them to recover.
The Integration: Using Cash Buckets to Protect Growth Buckets
Here is the Both/And solution: We use the 4% rule to determine how much we can safely spend in total, but we use the Buckets to determine where that money comes from.
- In Up Markets: We skim the profits from Bucket 3 (Growth) to refill Bucket 1 (Cash).
- In Down Markets: We leave Bucket 3 alone to recover. We spend down Bucket 1 and Bucket 2.
This simple mechanical shift solves the Sequence of Returns risk we discussed in the last post. It gives you the "Simple" clarity of knowing exactly which dollar you are spending, while keeping the "Sound" growth potential of the stock market working for your future.
Essential vs. Discretionary: Matching Reliable Income to Needs
To further simplify your life, we align your income sources with your expense types.
- Essential Expenses (Housing, Food) should be covered by Guaranteed Income (Social Security, Pensions) or Bucket 1 withdrawals.
- Discretionary Expenses (Travel, Gifting) can come from Bucket 3 performance.
If the market has a bad year, you might skip the European vacation (Discretionary), but your mortgage (Essential) is never at risk because that money was safe in Bucket 1.
How Simplicity Prevents Panic Selling
The greatest enemy of the retiree is panic. Panic comes from ambiguity—not knowing if you're okay.
When you look at a consolidated statement and see your net worth down 20%, you panic. But when you look at your S3 Time-Segmented Plan and see that Bucket 1 and Bucket 2 are perfectly intact, and only Bucket 3 (which you don't need for 10 years) is down, you remain calm. You stay the course. That is the power of Simple systems.
Summary
- The Conflict: Rigid withdrawal rules vs. complex account structures.
- The S3 Solution: Integrate the 4% rule (for sizing withdrawals) with Buckets (for sourcing withdrawals).
- The Benefit: You never have to sell a stock at a loss to pay for groceries.
Map Your Buckets
Does your current portfolio look like one big, messy pile? Let's organize it.
Download the Tool: The S3 Time-Segmented Bucket Planner
This Implementation PDF includes a simple worksheet to help you map your current assets into the Now, Soon, and Later buckets, giving you immediate visual clarity on your retirement timeline.
This post is part of our collection: S3 Retirement Distribution Mastery.
DISCLAIMER: This content is for educational purposes only and should not be considered personalized financial advice. Always consult with a qualified financial professional before making financial decisions.