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[Prefer to listen? You can find a podcast version of this article here: E242: How to Create Retirement Income From Your Investments – Three Popular Strategies]

As you near retirement, you're likely thinking about maintaining your lifestyle while ensuring your savings last. Moving from growing your wealth to relying on it takes some careful planning.

The strategy you choose can make a big difference in balancing your financial security with the lifestyle you want, helping you feel confident as you move forward.

Here’s a look at three common retirement income strategies—Systematic Withdrawals (Total Return with Rebalancing), the Bucket Strategy, and the Guardrails approach. Each one has its own strengths and challenges, depending on your goals, risk tolerance, and personal style.

Systematic Withdrawals is a traditional choice that aims for a steady asset allocation, drawing income from the whole portfolio.

The Bucket Strategy splits assets into different timeframes, which can feel reassuring and may help manage risk.

Finally, the Guardrails approach uses flexible spending rules, adjusting to market changes to keep things on track.

Understanding these strategies can help you make decisions that match your unique needs and goals, setting you up for a secure and fulfilling retirement. While each strategy provides a helpful guide, the best choice will come down to your goals and comfort with risk.

Note: All examples, including asset allocations, rates of return, and time horizons, are strictly educational examples and do not constitute recommendations or advice.

Systematic Withdrawals (Total Return with Rebalancing)

The Systematic Withdrawals or Total Return with Rebalancing approach is a well-known way to create retirement income. It keeps a balanced portfolio, often with a mix of stocks and bonds, like a 60/40 or 50/50 split, and withdraws a set percentage each year. A key part of this strategy is regular rebalancing to maintain the intended asset allocation.

This strategy’s main advantage is its simplicity and consistency. By setting a withdrawal rate—often around 4%, adjusted yearly for inflation—it provides a steady income. The stock portion of the portfolio may grow over time, potentially increasing the portfolio's value.

Rebalancing also lets you sell high and buy low, keeping your allocations aligned with your targets.

However, there are some drawbacks. One is the risk of poor market returns early in retirement, which can deplete assets quickly and make recovery difficult, even if the market improves later.

Also, some retirees may find it stressful to have their entire portfolio exposed to market ups and downs.

This strategy may appeal to retirees who are comfortable with some market risk and understand basic investing principles. It’s a good fit for those who want a set-and-forget approach once the initial setup is done.

But for those who want more income certainty or are especially cautious with risk, it might not be ideal.

Example: Systematic Withdrawals Strategy for a $2 Million Portfolio

Overview: In this scenario, the retiree has a $2 million portfolio and chooses an initial withdrawal rate of 4%, targeting an annual income of $80,000, adjusted for inflation each year. The portfolio is divided into a mix of stocks and bonds, rebalanced annually to maintain the desired allocation.

Step 1: Determine Asset Allocation

• Target Asset Mix:
• Stocks: 60% (for growth potential)
• Bonds: 40% (for stability and income)
• This allocation (often referred to as a 60/40 split) aims to balance growth and stability, supporting a steady income while allowing for some appreciation.

Step 2: Set Initial Withdrawal and Annual Adjustment

• Initial Withdrawal:
• 4% of $2 million = $80,000 for the first year.
• Annual Inflation Adjustment:
• To keep pace with inflation, the retiree increases the withdrawal amount by an assumed 3% inflation rate each year.
• This increase helps maintain purchasing power over time, though the rate can be adjusted based on actual inflation.

Year-by-Year Breakdown of Withdrawals and Rebalancing

Below is a hypothetical year-by-year summary showing how withdrawals might look over the first few years of retirement, including rebalancing to maintain the 60/40 asset allocation.

Year 1

• Portfolio Value: $2 million
• Withdrawal Amount: $80,000 (4% of $2 million)
• Asset Allocation After Withdrawal:
• Stocks: $1.2 million (60% of $2 million)
• Bonds: $800,000 (40% of $2 million)

• After the $80,000 withdrawal, the retiree checks the portfolio to ensure the 60/40 allocation is intact. Any drift from this allocation due to market performance is corrected by rebalancing.

Year 2 (Assuming 3% Inflation Adjustment)

• Adjusted Withdrawal: $80,000 + 3% = $82,400
• Portfolio Value: $2,035,200 (assuming a modest 6% market growth after withdrawals)
• New Withdrawal Rate: $82,400 / $2,035,200 = approximately 4% (still within a safe withdrawal range)

End-of-Year Rebalance:

• Stocks and bonds are rebalanced back to the 60/40 split based on the portfolio’s new value.

Year 3 (Assuming Another 3% Inflation Adjustment)

• Adjusted Withdrawal: $82,400 + 3% = $84,872
• Portfolio Value: $2,069,968 (assuming a 6% market growth after withdrawals)
• New Withdrawal Rate: $84,872 / $2,069,968 = 4.1%

End-of-Year Rebalance:

• Stocks and bonds are again rebalanced to maintain the desired 60/40 allocation, ensuring that the portfolio’s risk level aligns with the retiree’s initial plan.

Pros and Cons of the Systematic Withdrawals Strategy

Pros:

• Simplicity: This strategy follows a set withdrawal plan and maintains a steady asset allocation, reducing complexity.
• Potential for Growth: Stocks offer growth potential, and the strategy doesn’t require market timing, which helps keep the process straightforward.
• Income Consistency: The retiree can anticipate a predictable income stream, adjusted for inflation, which helps with budgeting.

Cons:

• Sequence of Returns Risk: Market downturns early in retirement can erode the portfolio faster than anticipated, especially if combined with large withdrawals.
• Market Volatility: Because the portfolio is fully exposed to market fluctuations, retirees may experience anxiety during downturns.
• Inflation Sensitivity: Inflation adjustments are helpful, but higher-than-expected inflation could strain the portfolio, requiring additional adjustments.

Bucket Strategy

The Bucket Strategy organizes assets based on when you’ll need them in retirement, usually into three to five “buckets.”

The first bucket has low-risk, liquid assets like cash or short-term bonds for immediate expenses over the next one to three years. The next bucket includes bonds and conservative equities for the next five to ten years, and further buckets focus on growth investments like stocks for later retirement years.

A big advantage of the Bucket Strategy is its structure, which can ease worries about market drops by ensuring immediate needs are covered with safe assets. It also helps with market risk since retirees can avoid selling growth assets in downturns by using funds from safer buckets.

However, it does come with some downsides. Managing multiple buckets can be more complex, requiring frequent rebalancing. And, if the early buckets are too conservative, you might miss out on growth potential from the market.

Example: Three-Bucket Strategy for a $2 Million Retirement Portfolio

Overview: This retiree’s portfolio is split into three main buckets to cover short-term, intermediate-term, and long-term retirement needs. Each bucket serves a different purpose, with assets chosen to meet specific time horizons and goals.

Bucket 1: Short-Term (Years 1-3)

• Purpose: Provide immediate income to cover annual living expenses without needing to rely on investments that fluctuate with the market.
• Allocation: $300,000 (3 years x $100,000 annual income need).
• Asset Type: Highly liquid, low-risk assets like cash, money market funds, and short-term bonds.

Example Allocation:

• Cash: $180,000 (enough for the first 18 months of living expenses)
• Short-term bonds: $120,000

Objective: This bucket ensures the retiree has ready access to funds to cover the first three years of expenses without tapping into investments exposed to market volatility. This setup provides a cash buffer that can reduce stress about short-term market swings.

Bucket 2: Intermediate-Term (Years 4-10)

• Purpose: Support mid-term income needs, balancing some growth with income potential.
• Allocation: $700,000 (aimed at covering years 4 through 10).
• Asset Type: A mix of bonds, dividend-paying stocks, and balanced funds.

Example Allocation:

• Intermediate-term bonds: $300,000
• Dividend-focused mutual funds or ETFs: $250,000
• Balanced fund (stocks and bonds mix): $150,000

Objective: This bucket is designed to maintain a balance between income generation and modest growth. Dividend stocks and balanced funds can provide income with some growth potential, while bonds add stability. As Bucket 1 depletes, this bucket can be tapped to refill it, ensuring a steady income while minimizing the need to sell volatile assets.

Bucket 3: Long-Term (Years 11+)

• Purpose: Fuel long-term growth to sustain income in the later years of retirement, providing protection against inflation.
• Allocation: $1,000,000 (allocated for years 11 and beyond).
• Asset Type: Growth-focused investments, including a diversified mix of equities (stocks) and equity-focused funds.

Example Allocation:

• U.S. large-cap stocks: $500,000
• International stocks: $250,000
• Growth-focused mutual funds or ETFs: $250,000

Objective: This bucket aims for higher returns to counter inflation and maintain purchasing power over the years. With an 11-year-plus horizon, this bucket can afford to be more aggressive, as the retiree won’t need to draw from it immediately. Over time, growth investments in this bucket can support the portfolio’s longevity and provide additional funds as Bucket 2 and Bucket 1 are replenished.

Managing and Rebalancing Buckets

Annual Rebalance: Each year, the retiree reviews the portfolio and makes adjustments as needed:

• If Bucket 1 is depleted or running low, funds from Bucket 2 (if it has grown) can be moved over.
• Profits from Bucket 3, especially after strong market years, can be used to refill Bucket 2, keeping the overall portfolio balanced and supporting the next phase of retirement needs.

Market Downturn Scenario: If markets decline, the retiree can rely on Bucket 1 for immediate expenses, giving Bucket 3 time to recover. This minimizes the need to sell stocks or growth-oriented funds during a market low, protecting the portfolio’s long-term potential.

Pros and Cons of The Bucket Strategy

Pros:

• Income Stability: Bucket 1 holds three years’ worth of expenses in stable assets, providing peace of mind regardless of market performance.
• Flexibility: This approach allows for adjustments depending on how markets perform and the retiree’s changing needs.
• Risk Mitigation: By structuring the portfolio in phases, the retiree can avoid taking withdrawals from volatile assets during down markets.

Cons:

• More Complex Management: Managing multiple buckets requires monitoring, periodic rebalancing, and strategic refilling, which can be time-consuming.
• Potentially Conservative Early Buckets: If too much is kept in conservative assets, inflation could diminish purchasing power, necessitating greater reliance on the growth bucket over time.
• Market Timing for Refills: Deciding when and how to replenish each bucket involves a bit of market timing and discipline, which can be challenging, especially if the market is volatile.

Guardrails Strategy

The Guardrails approach offers flexibility by adjusting spending in line with portfolio performance.

It starts with an initial withdrawal rate—usually 4-5% of the portfolio’s value—then sets upper and lower limits for spending. If good market performance lowers the withdrawal rate below the minimum, spending can increase.

If poor performance pushes it above the upper limit, spending is cut back to help the portfolio recover.

This approach has a few benefits. Retirees can spend more during good markets, improving their lifestyle when possible. At the same time, the Guardrails approach lowers risk in downturns by adjusting spending, which can help the portfolio last longer.

However, there’s a downside to consider: income can vary, making it harder to budget. Some retirees, especially those with fixed expenses, may find these fluctuations challenging.

Additionally, keeping up with the Guardrails approach requires regular adjustments, which might mean getting help from a financial professional.

Example: Guardrails Strategy for a $2 Million Portfolio

Overview: In this example, the retiree starts with a $2 million portfolio and a desired initial annual withdrawal rate of 4% ($80,000) to meet living expenses beyond Social Security or pension income. The Guardrails Strategy is set up with spending limits to help maintain the portfolio's longevity by adjusting withdrawals according to market performance.

Step 1: Set Initial Withdrawal Rate and Guardrails

• Initial Withdrawal Rate:
• 4% of $2 million, which equals $80,000 annually.
• Guardrails:
• Upper Guardrail (Ceiling): If the withdrawal rate rises above 5% of the current portfolio value, spending is reduced to bring it back within bounds.
• Lower Guardrail (Floor): If the withdrawal rate falls below 3%, spending can be increased to allow the retiree to enjoy more during strong market conditions.

These guardrails provide a structured framework for adjusting spending as the portfolio value fluctuates with the market.

Step 2: Adjust Spending Based on Portfolio Performance

The retiree reviews the portfolio annually to see if spending adjustments are necessary based on the guardrails. Here’s how the adjustments might look in different scenarios over the first few years:

Year 1 (Starting Point)

• Portfolio Value: $2 million
• Annual Withdrawal: $80,000 (4% of $2 million)
• Guardrails:
• Upper Guardrail: 5% of $2 million = $100,000
• Lower Guardrail: 3% of $2 million = $60,000
• Action: No adjustment needed, as the withdrawal rate is within the guardrails.

Year 2 (Market Decline Scenario)

• Portfolio Value: $1.6 million (20% market decline)
• Withdrawal Rate: $80,000 is now 5% of $1.6 million, hitting the upper guardrail.
• Action: Spending is reduced to bring the withdrawal rate back within the guardrails.
• New Withdrawal: 4% of $1.6 million = $64,000
• Adjusted annual spending is now $64,000, down from $80,000, to preserve the portfolio.

Year 3 (Partial Recovery Scenario)

• Portfolio Value: $1.8 million (markets recover slightly)
• Withdrawal Rate: $64,000 is now 3.56% of $1.8 million, comfortably within the guardrails but below the original $80,000.
• Action: The retiree could either stick with $64,000 or modestly increase to 4% of $1.8 million, allowing for a $72,000 withdrawal this year, balancing increased spending with portfolio preservation.

Year 4 (Strong Market Recovery Scenario)

• Portfolio Value: $2.2 million (market rebounds above original value)
• Withdrawal Rate: $72,000 is now 3.27% of $2.2 million, approximately hitting the lower guardrail.
• Action: Increase spending to bring the withdrawal rate closer to the original 4% guideline.
• New Withdrawal: 4% of $2.2 million = $88,000
• The retiree can increase spending to $88,000, benefiting from market growth while staying within safe limits.

Pros and cons of the Guardrails Strategy

Pros:

• Market-Responsive Flexibility: Adjusts spending based on market performance, allowing retirees to enjoy higher income in strong markets and reduce withdrawals in downturns, which can help protect the portfolio.
• Reduces Sequence of Returns Risk: By lowering withdrawals during poor market years, this strategy minimizes the impact of early market downturns, which can erode a portfolio’s longevity if large withdrawals are made during declines.
• Prolongs Portfolio Lifespan: The guardrails approach helps to stretch savings over the long term, potentially sustaining income throughout retirement, especially useful for those with longer life expectancies.
• Enhanced Lifestyle in Good Markets: Retirees can increase spending when the portfolio performs well, allowing them to enjoy a higher standard of living when feasible, rather than sticking rigidly to a fixed income.
• Structured Framework: Provides clear rules for when to adjust spending, offering retirees a defined approach for managing withdrawals rather than relying on ad-hoc decisions.

Cons:

• Income Variability: Spending adjustments can lead to fluctuating income, which may make budgeting challenging. This inconsistency can be difficult for retirees with fixed monthly expenses.
• Requires Ongoing Monitoring: Regular reviews and adjustments are necessary to stay within guardrails, which could be labor-intensive or require an advisor, especially for those unfamiliar with portfolio management.
• Potential for Spending Cutbacks in Downturns: Reducing income in market downturns may be challenging for retirees who depend on a fixed or higher income level to cover essential expenses, such as healthcare costs.
• Not Ideal for Highly Risk-Averse Retirees: Because this strategy requires some exposure to market fluctuations, it may not suit retirees who prefer a more stable, predictable income source without market-related adjustments.
• Complexity in Setting Guardrails: Determining the appropriate upper and lower guardrails requires careful planning and may require financial advice to ensure limits are appropriate for the retiree’s risk tolerance and income needs.

Comparison and Conclusion

Choosing the right retirement income strategy is key to enjoying the retirement you want. Comparing Total Return, the Bucket Strategy, and Guardrails shows each has strengths and potential downsides.

Total Return offers a straightforward plan but exposes you to market ups and downs. The Bucket Strategy can help you feel secure during market shifts, though it may be more complex to manage. The Guardrails approach is adaptable, potentially extending your portfolio’s life, but income can fluctuate.

Several factors can help you decide. Your comfort with risk is important. If you’re fine with market changes, Total Return or Guardrails might work. If you prefer stability, the Bucket Strategy could be a good fit.

Income consistency is also worth considering. Total Return allows regular withdrawals, Bucket Strategy provides near-term certainty, and Guardrails adjusts based on market conditions. Also, consider any legacy goals, as each plan affects inheritance differently.

Your ideal strategy depends on your needs and preferences, and these options don’t have to be used alone. You could combine approaches—for instance, using a Bucket Strategy for short-term needs and Guardrails for flexibility over time.

Given the complexity of retirement planning, seeking advice from a financial expert can be valuable. They can help you understand each strategy and build a plan that aligns with your retirement vision.

After all, retirement planning is about more than income; it’s about designing a future that lets you enjoy what matters most.