Are 3-Bucket Models Really More Conservative Than 2-Bucket Models?

A common misconception among retirees and financial advisors is that a 3-bucket model must be more conservative than a 2-bucket model.

To test this assumption, I asked Gemini, Claude, and ChatGPT which model is more conservative. Only two of the three got it right.

The key is the total number of years of expenses covered by the Safety and Income Buckets.

If a 3-bucket model covers substantially more years of expenses outside equities than a 2-bucket model, it may be more conservative because more money is allocated to defensive assets.

But if both models cover the same number of years, the 3-bucket model will often be less conservative. That's because some money that would otherwise sit in the safer Safety Bucket is now allocated to the relatively more aggressive, higher-earning Income Bucket.

This assumes the Income Bucket is more aggressive than the Safety Bucket. If the reverse is true, the comparison can reverse too.

Now, let's compare three common approaches:

1. Two-bucket model: the Safety Bucket and the Growth Bucket. The Safety Bucket is the defensive allocation, while the Growth Bucket provides long-term growth.

2. Three-bucket constant-refilling model: The Income Bucket regularly refills the Safety Bucket, keeping the Safety Bucket at its target level. The Growth Bucket refills the Income Bucket in years when the market performs well.

3. Three-bucket stacked model: The Growth Bucket refills the Safety Bucket when markets perform well. The Income Bucket does not refill the Safety Bucket; instead, it remains invested until the Safety Bucket runs out, at which point the Income Bucket begins funding expenses.

Retirees don't have to stick with one approach throughout retirement. They can pick one model at the start of retirement, and switch to another towards the end.

CherishBuckets.com lets you test these models using both deterministic projections and Monte Carlo simulations. You can also experiment with equity glidepaths and coverage percentages. For example, you could cover 75% of expenses through the Safety and Income Buckets and fund the remaining 25% through the Growth Bucket.

Whether you're evaluating strategies for yourself or your clients, you can use CherishBuckets to compare the approaches and see how they perform under different assumptions.