Bucket Strategy vs. 60/40: Which Retirement Funding Approach Helps You Actually Enjoy Your Golden Years?
Retirement strategies help people make smart decisions with their money today so they have more financial flexibility in the future. It’s good to have a long-term mindset, but two popular frameworks – the bucket strategy and the 60/40 portfolio – have some people torn about how to allocate their money.
The topic received plenty of debate on Reddit as people argued which one offers the better approach for enjoying your golden years.
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Stocks Can Produce Higher Returns Than Bonds
Equities can outperform bonds by wide margins during bullish economic cycles. While fixed-income assets often yield close to 4%, some stocks produce double-digit annualized returns over vast stretches. Investing in an index fund or a thematic exchange-traded fund (ETF) makes it easier to get exposure to equities.
This wisdom can cause people to question why they would allocate 40% of their capital into bonds. The bucket strategy often offers a cash buffer to cover two to three years' worth of expenses via cash and cash equivalents. That includes high-yield bonds, so fixed income still has value. However, that cash reserve makes it easier to put remaining funds into the stock market.
One Redditor explained that their mother held mostly stocks despite receiving suggestions to diversify into bonds. She kept most money in stocks, knowing she had the safety net of Social Security, a pension and a fully paid off house.
The 60/40 Rule Is Simpler
Putting 60% of your assets in equities and 40% in bonds may be simpler than deciding on buckets and how much to allocate into growth stocks. This ratio relies on simple math and is easier to maintain than the bucket strategy. You have to review a 60/40 portfolio only one to four times per year, depending on your preference, while you have to stay more on top of a bucket strategy.
The 60/40 rule also gives you the flexibility to automatically rebalance your portfolio. Some ETFs are specifically designed to mimic the 60/40 rule, so you don’t even have to check your portfolio. The bucket strategy involves making more decisions on your own, with variables like inflation and market volatility impacting how you refill your buckets.
It’s Not About Portfolio Theory
There isn’t a definitive answer about whether the 60/40 allocation is better than the bucket strategy. Both retirement models have strengths and weaknesses that create more nuance than a universal approach.
The best strategy aligns with your risk tolerance and preferences. Retirees who don’t want to get too involved with portfolio allocation should likely stick with the 60/40 model, especially with some ETFs making it extremely easy to maintain this ratio.
Investors who want more control over their money and the ability to invest more money in the stock market may prefer the bucket strategy. Having a large cash buffer makes it easier to pour remaining funds into equities. You can also adjust the 60/40 portfolio to a 65/35 or a 70/30 allocation to get more exposure to equities. The best retirement strategy is the one that gives you peace of mind and works for you.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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