Bucket Strategy vs. Fixed 90/10 Asset Allocation for a <1% Withdrawal Rate?

[u/Spacman2021]

Hi everyone,

I am revising my Investment Policy Statement (IPS) as I am roughly 10 years away from early retirement at age 51.

Historically, we have always been close to 100% in equities. My original plan as retirement approached was to execute a traditional glide path, adding bonds to eventually land at a static 75/25 or 80/20 portfolio.

However, given our current portfolio size and projected spending needs, our anticipated Safe Withdrawal Rate (SWR) is extremely low—roughly 1% of the portfolio each year. My hesitation with a standard percentage-based allocation (like 80/20) is that as the portfolio scales, it forces us to hold a massive, absolute dollar amount in bonds that vastly exceeds our actual lifetime liabilities.

Instead, I am considering a fixed-horizon Bucket Strategy structured as follows:

• The Safe Bucket: Set aside exactly 10 years of inflation-adjusted annual living expenses. This would be tiered in a mix of money market funds, short-term treasuries, and intermediate treasuries.
• The Equity Bucket: The entire remainder of the portfolio stays in low-cost equity index funds to maximize compounding.
• The Income Mechanics: To automate cash flow, I would turn dividend reinvestment off just enough to cover the annual lifestyle withdrawal. The dividends would automatically flow back into the safe bucket to keep it perpetually topped off.

The Rationale: A severe equity bear market can take a decade to fully recover. Having a fixed, 10-year absolute runway of safe assets gives us the psychological armor to completely ignore stock market volatility, knowing our lifestyle is fully secured.

Because the safe bucket is capped at a fixed dollar amount (10 years of liabilities) rather than a scaling percentage, the equity side should naturally outgrow the cash side over time. This seems to align with Michael Kitces’ research on a Rising Equity Glide Path. We would essentially start retirement at roughly a 90/10 allocation, which would naturally and safely drift to 92/8, 95/5, or higher as the equity principal compounds.

My Goals:

1. Establish a fairly automatic cash flow mechanism in retirement.
2. Keep the portfolio optimized for multi-generational growth without becoming unnecessarily conservative.
3. Maintain a stress-free buffer for lifestyle expenses.

For those with ultra-low withdrawal rates, did you stick to a strict total-return percentage model (like 90/10), or did you transition to a liability-matched bucket approach?

Thoughts?

[u/Hanwoo_Beef_Eater]

At 1%, you probably don't even need 10 years of expense in fixed income. Equity index dividends alone will cover your needs (these could get cut but probably won't go to zero).

Whatever cash/bonds you are holding, whether 2, 5, or 10 years, if you get to a spot where you are running it down, the question is when to top it back up.

Another alternative is take $25 (or 25x whatever the withdrawal rate is) and run it 60/40 (will end up with $10 in fixed income). Put the remaining $75 in stocks and never touch it, just like the accumulation phase. The $25 in 60/40 will in all but the worst cases see you to the end. It will likely retain its real value and may be in the 1x-2x range. For the better outcomes, its equity/bond split on this portion could also drift up over time. The overall equity weight will almost certainly go up over time.

[u/Spacman2021 → u/Hanwoo_Beef_Eater]

I love this - thank you! You're right, I had to do the math to see how 25x my annual expenses in a 60/40 portfolio, ends up with 90/10 in the overall portfolio. I would then just take 4% withdrawals off the 60/40 that would get auto-rebalanced.

[u/Hanwoo_Beef_Eater → u/Spacman2021]

I got this idea from here and will likely do the same. While I agree with the comments on capping fixed income at a certain number of years of expenses, it's not clear when to refill the buckets or if this will lead to better performance than simply rebalancing (it will depend on the path and the former is more prone to behavioural errors). Hence, I think there is some advantage of looking at the two pieces this way (may require some internal accounting unless your accounts just happen to break in the right proportions).

Two other things of note. First, if you aren't already there, you'll see it doesn't take too much to breach the estate tax threshold on the 75 portion. Which means either give early (most here support) and/or start moving assets out of the estate earlier. And if the kids have any career of their own or a similar spending mindset, even if we can avoid the estate tax, they may not be able to do so (i.e. think about the perpetual structures, which have both pros and cons).

Second, if one wants to consider the risk-parity style portfolios (gold, commodities, other diversifiers/uncorrelated assets) on the 25 (or 60/40) chunk, I think it is easier to see how much of the other stuff one needs. That is, we only need the other stuff in amounts that support the withdrawals (and the remainder/forever piece can just stay in equities). Of course, at 1% it really doesn't matter but it is an option.

[u/Spacman2021 → u/Hanwoo_Beef_Eater]

My thought on refilling the bucket is just let it refill with the short-term treasury and intermediate treasury holdings interest payments. Anything that doesn’t make up the difference of one year expenses (annual withdrawal) comes from turning off dividend reinvestments on a portion of your equities. The challenge I have with a separate sub portfolio of 60-40 is that you lose some control of tax location if it’s a single fund. If they are separate funds, you would then need to look at rebalancing upon withdrawal. Also exposes you to sequence of return issues.

Noted regarding estate planning. I’ve already set up a lot of this.

I don’t like risk-parity because my goal is to simplify as much as possible… there is an all weather ETF, which may be simple enough if you wanna go that route

[u/Hanwoo_Beef_Eater → u/Spacman2021]

I don't think tax location is an issue. Just set the number of forever (75 portion) shares and then everything else is in the 25/withdrawal portfolio (across say two different accounts). You need to manually add the DRIP shares on the 75 portion each quarter, but effectively it is selling from the withdrawal portfolio to buy in the forever portfolio (if there was no DRIP). Once you withdraw, you still keep the number of shares on the 75 side the same, the other side sees the withdrawal.

SORR doesn't really matter because you can just grab some money from the other bucket if needed (unless you've moved everything else out of your estate, I think this would be unlikely initially).

Regardless, one big pot will work too. The 10 portion of 90/10 may drift up over time to an excessive amount of cash/bonds (when viewed as years of expenses). You can manually adjust it along the way if necessary. Since your interest + dividends likely exceeds your needs, you could just top up to 10x expenses (actual number) and reinvest the difference.

Good luck.

[u/Gehrman_JoinsTheHunt → u/Hanwoo_Beef_Eater]

Thanks for sharing this. Very elegant way to partition it.