A new approach to creating retirement cash flow

The challenge for many retirees is creating a sustainable cash flow in a low interest rate market. Many retirees cannot live on the current yields of GICs, bonds, and stock dividends. Those who try to satisfy their needs by using high-yield bonds or dividend-paying stocks may take on misunderstood risks.

Based on William Bergen’s 1994 research, many advisors have advocated using a portfolio withdrawal rate of 4% from a diversified portfolio to overcome these problems. He examined every 30-year period since 1926 and found that a portfolio of 60% stocks and 40% bonds could sustain a 4% withdrawal of the initial balance adjusted for inflation each year without fully depleting the portfolio.11 The idea was to focus on making the money last one’s lifetime.

This withdrawal rate methodology has been criticized due to the historically higher interest rates used in the original research, which can’t be expected in today’s market. Thus some argue for an even lower withdrawal rate.

Most retirees need to change from a “savings mode” focused on capital accumulation, to a “draw down mode” that requires them to take money out of their portfolio for spending needs. We use buckets to describe a method for allocating investments around when future spending will occur, and have created a methodology for how best to allocate money into buckets and then rebalance between those buckets.

We address three important risks to your retirement portfolio:

1. Point-in-time risk

The risk of having your portfolio’s value descend just when you have locked in a fixed dollar amount to either withdraw or to spend. For example, individuals who retired in 2007 and saw their portfolio shrink significantly in 2008 often continued to pull the same amount out each year, effectively withdrawing a much higher percentage of the portfolio and reducing the probability of their portfolio’s lasting for a lifetime.

2. Longevity risk

This risk relates to living longer than your money can last. Life expectancy has increased, which means retirement assets must sustain investors for a longer period. Investors should plan for an age, such as 95, that is reasonably likely and requires the assets to last much longer than the superscript of the percentile life expectancy people often use as a baseline.

3. Behavioural risk

We feel the greatest risk to investors is behavioral risk. Chasing last year’s big performers, not selling losers, over-confidence in a company or industry and selling out during a market correction are some examples of self-destructive behaviours.

The three buckets


The first short-term bucket will have a fixed dollar amount allocated to money market and short-term bond funds to cover the first several years of living costs. It acts as an umbrella that provides the peace of mind to stay invested for the long-term.


The second bucket covers extended living costs and unforeseen financial responsibilities.


The third long-term growth bucket enables the portfolio to overcome or offset withdrawals. It consists mostly of equities with a small portion of inflation- protected bonds.



When retirees know they have eight to fifteen years of living costs in relatively low volatility asset classes, they do not fall victim to behavioural risk by pulling their money out of the market in times of crisis. We can reassure them that they have time on their side for the market to recover. While the overall allocation of the portfolio often remains between 50% to 60% equities, buckets allow us to better manage client investment behaviour.