Buckets and Glidepaths: What to Do With Your Money After Retirement

Do you ever feel like you spend most of your life saving and saving and saving for retirement (or financial independence), worrying about how much you should have invested in stocks or bonds or mutual funds or GICs, and if it’s enough, but that what you do with your money after you reach that magical goal is a complete and utter mystery?

Yeah.  So does the rest of Canada.  We concentrate so much on the “how much do I need to retire?” question that the “and how should it be structured?” question gets ignored completely, and we create repeat generations of confused people in their sixties, with a pile of money and no clue what to do with it.

Related: Have you made your retirement plans?

See, the shift between “stop saving” and “start spending” is pretty quick, but how the spending happens is just as important – if not more so – than how the saving happens, and there’s no interregnum between the two where you get to sit on top of your accumulated hoard, gloating like a dragon and contemplating your withdrawal strategy.

The single most dangerous time for your investments is in the few months and years when you start needing money from them.  Normally, when the markets go for a dive and your investments start to lose value, it’s only on paper.  You’re not actually selling your mutual funds at a 40% loss because – as a wise, steady investor – you stay invested through the good times and bad, regularly rebalancing your portfolio and adding to it with ongoing savings, right?  But you saved up your money because, presumably, you need it to live on, and if you stop working on June 3rd, 2021, you’re going to have to eat on June 4th, 2021, no matter what the stock market decides to do that day.

But here’s the catch: while it’s a wise move to have some money available for you to access without fear of volatility in the short period after retirement, it’s not wise at all to protect every single penny from the vicissitudes of the stock market for the long term, because inflation will devour it and increase the chances of you running out of money long before you should.

Related: Effective retirement planning is about spending, not saving

What you need to understand is that you have zero control over what the markets will be doing when you retire, and how strongly their behaviour determines the likelihood of your investments providing you sufficient income until you die.  There are only three possible market scenarios:

  • The market goes for a nosedive right when you start spending, and the remaining money isn’t enough to benefit much from later recoveries. (this is bad)
  • The market is white-hot when you retire and start withdrawing, and your investments grow enough in the first half of retirement that no subsequent downturn can diminish them faster than you need to spend. (this is good)
  • The market is in-between one of the two states. (this is…meh)

So what’s a wise dragon to do?  My advice (based on research from Dr. Wade Pfau and Michael Kitces, the two smartest minds in retirement income planning today, whose work you can follow here) is to think in buckets.

The first bucket is the one you’ll spend from in the first few years of retirement, when you’re most vulnerable to sudden drops in value.  The second bucket is the one that holds the rest of your nest egg, invested in equities and therefore continuing to grow throughout the twenty or so years of average life-expectancy you’ll have after the office door swings shut behind you for the last time.

Related: 16 habits that helped me retire wealthy

I’m sure you’ve heard or read that your asset allocation should shift towards less volatile investments as you approach the point in time where you stop accumulating and start withdrawing.  That’s pretty solid conventional wisdom, and in the context of the buckets, it means you fill up your safe spending bucket gradually as you get closer to needing it.  What might give you the willies is the next part of the Pfau-Kitces research: once you actually start withdrawing, your equity allocation should start to increase again.

What they refer to as the “rising equity glidepath”, you can intuitively grasp as the gradual emptying of the spending bucket and the gradual but still volatile growth of the continued savings bucket.  It doesn’t mean that if the market value of everything you own is acceptable at retirement that you still slavishly withdraw only from your spending bucket; instead it gives you the maximum protection possible from the worst of the retirement scenarios, while giving you flexibility to benefit from the best of them.

Sandi Martin is an ex-banker who left the dark side to start Spring Personal Finance, a one woman fee only financial planning practice based in Gravenhurst, Ontario.  She and her husband have three kids under five, none of whom are learning the words to “Fidelity Fiduciary Bank” quickly enough.  She takes her clients seriously, but not much else.

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  1. Hannah on October 11, 2013 at 8:10 am

    I have been retired less than six months. It takes a lot of bravery to start spending. But I trust my asset mix, and I had prepared a reasonable retirement budget while I was still working and just started living on my “new budget” the moment I retired. It is an adventure. Slow living. Enjoying each day. I do not take a percentage of my savings out each month, I take a reasonable set amount that goes with my other streams of income to give me a retirement income that is sufficient. I will decide in a year or so if I can increase what I am taking out. I have lived through many ups and downs in the market. I don’t worry unnecessarily. It’ll do what it does.

  2. fiscally fit on October 11, 2013 at 10:18 am

    I think one of the worst things people do is make the mistake regarding the time horizon of their investments. Alomost immediately after people retire, they make the change to their perceived time horizon to a year or two just because they are taking an income. Yet, the majority of the investments need to last 10, 20, 30+ years. Instead of simply having a cash layer and the remainder in lower volatility investments, they go to the extreme.

    • Sandi on October 11, 2013 at 12:02 pm

      I’d venture to say that some of the reason for this should fall at the feet of advisors who never took the time to think about post-retirement distribution in favour of focusing exclusively on pre-retirement asset-gathering. One of these activities is more lucrative than the other…

  3. fiscally fit on October 11, 2013 at 1:29 pm

    maybe, but I believe that it is more of a function of people truly not knowing how much risk is in their portfolios and how much volatility they can actually live with. This issue is prevalent in both DIY and advisor managed portfolios. It is a scary idea.
    But I do agree most people and advisors ignore how people will draw on their wealth efficiently and focus on accumulation.

  4. Cory Papineau on October 11, 2013 at 1:41 pm

    A really good book for Canadians is the Your Retirement Income Blueprint by Daryl Diamond. Here is a blurb about the book.

    The Retirement Income Blueprint lays out a six-step process for “taking apart” accumulated assets, making the most out of what you have taken a lifetime to save, and creating an “Income Continuum” to produce income that lasts as long as you do.

    One big issue that people run into are advisors who don’t want to “let go” of the assets and see income flowing out. I strongly suggest even if someone may not NEED the income to consider withdrawals because of present and future tax considerations.

    The plan for accumulation is NOT the same as the plan for cash flow and it needs to be considered very carefully. Remember in retirement you will have 3 or 4 income streams usually and sometimes even more so getting a handle on this initially can be daunting.

    • Sandi on October 11, 2013 at 1:50 pm

      Good recommendation, Cory!

  5. Wade Pfau on October 11, 2013 at 3:54 pm

    Sandi, thanks for the clear and insightful explanation of the rising equity glidepath idea.

    • Sandi Martin on October 11, 2013 at 3:57 pm

      Thanks for your kind words, Wade – but thanks for your research more!

  6. Robert on October 11, 2013 at 9:00 pm

    Hi Sandi

    Thanks for an interesting article with fresh useful thoughts. I certainly agree that most advice one reads is about how to arrive at a certain sized nest-egg, rather than what to do the next day. I have tons of things to figure out, although not so much along the lines you address in this blog.

    I always viewed the retirement years, lasting 30-40 years for many now, and the working years around 40 or so to not be different enough to warrant a huge difference in strategy.

    With the missing paycheque most will not be able to invest as much in retirement, but investment still has to be part of the game plan as long as inflation exists.
    So I figured the question is how to maximize the investment portion of my retirement income. For one example, if one uses CPP and/or OAS as the inflation fighter/indexer, inflation will bight a lot less down the road.

    I agree volatility in the years just before and after retirement can be daunting, so this may be a reason to have a good hoard of cash entering that phase, but this need not dominate the portfolio as a whole.

    I figure in the early going your income from investments and the hoard of cash ought to define lifestyle and pay the way. Your ongoing investment plan will take a portion of the total income to hedge for inflation.

    With a few decades to go I think drawing from equities any time soon is a way to risky. My concern looking ahead is that eventually I will not want to manage my stocks and other investments. However, time, in this case death, is on my side. Every year that passes I will get offered more generous annuities as my end is drawing closer :-).

    • Sandi on October 12, 2013 at 1:50 pm

      Good perspective, Robert, especially on the often-discounted stability that CPP/OAS give to retirement income.

      Also: Love your “death is on my side” thinking on annuities.

  7. Gary on October 13, 2013 at 7:10 am

    hi sandi: first let me say that i enjoy your blogs both here and on your site. we are entering our 8th year of retirement and while we planned our withdrawals they haven’t been on budget. i think in your first years you are much more active — travel etc. soon our travel insurance will be sky rocketing and our health will go down hill and our retirement will be more sitting on the front porch thus needing less income. i know i’m a little off topic but withdrawal rates as described in the article (4%) just won’t cut it for us. we want to enjoy our selves while we still can. if i run out of money, i’ll become a blogger and blog about how wrong i was –LOL. ( by the way our allocation is 85% equities and 15% bonds).

    • Sandi on October 13, 2013 at 7:48 am

      Hi Gary, thanks for the compliment!

      You’ve effectively pinpointed the very real difference between “retirement planning” and “retirement living”. While planners use tools like the (now questioned) 4% safe withdrawal rule to determine what size of portfolio a prospective retiree might need to ensure themselves enough income no matter what the markets do, the real story starts when you actually retire.

      At that point, instead of trying to account for every possible market scenario, you’re dealing with the real thing. Probability planning stops being as important as what the market is actually doing, and how best to roll with whatever punches are thrown (or not) once your ability to earn more income outside of market returns ends.

  8. fiscally fit on October 15, 2013 at 5:00 pm

    Exactly, building in margins of error is a big part of retirement planning. Whether that is working part time, turning down the tax rate, or simply doing some tax planning; the more margins of error you build in to your plan the better!

  9. CanadianDaniel on October 27, 2013 at 8:49 am

    Great insights, thank you. Fortunately, my wife and I are both savers who derive more satisfaction from saving than wants-driven spending. Delayed gratification has real benefits, even in retirement. I do know many people who subscribe to the “you can’t take it with you, so spend it now” camp, however.

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