Is two retirement buckets enough

[Moneymatters]

I currently have no bond allocation. In retirement, is two buckets (cash and equity investments) a terrible idea?

My company retirement allowance(and hopefully severance), as cash, is enough to provide the retirement lifestyle I want for several (8-9) years whilst also continuing max new NISA (we'll also sell and reinvest expiring General NISA accounts.) and invest some into ideco.

I’ll keep an eye on the market and sell to top up when I have maybe only 2-3 years in spending cash left.

Or I could divert cash (above 2-3 years spending) to a bond allocation then concern myself with periodic balancing and selling. But I’m thinking that Japan inflation will be modest so whilst there is an opportunity loss it’s going to be one less thing to worry about for the first several years of early retirement.

I’m fine if people want to link articles but happier to see some personal takes.

[captainspoke]

The way I understand and have approached it, there are three buckets which are defined/constrained by the timeframe they relate to. So bucket 1 is short term, 2 is medium, and 3 is long term. And sometimes there's reference to an extra bit of cash for the beginning, so bucket 0 (tho I haven't seen it called that).

Long term is perhaps easiest--10+ years as a time horizon. For buckets 1 and 2, I've seen somewhat flexible numbers, but bucket 1 might be 2-5 years, and then bucket 2 from 5-10, with an initial block of cash for years 1-2.

Equities in bucket 3, longer bonds and some equities in bucket 2, short term bonds/CDs in bucket 1. Both the specific years for each bucket, and what you might put/keep in each will vary according to a person's risk tolerance, whether they've under/over-saved, and personal details like the delta you think there'll be between your income/pensions and future/ongoing expenses.

So your question: "is two buckets (cash and equity investments) a terrible idea?" As they say online, IMNSHO, no.

Personally, this is what I've done. I've kept a large bucket of cash in the bank here in japan--effectively buckets 1 and 2. Since I'm US and have invested there, that's my bucket 3 (equities). This has kept me confident, secure, and sleeping comfortably at night (also naps!).

But I also see, now, two alternate trajectories--things that could have happened had I done it differently. One, I could have put a lot more in equities (would have been in $), and had I done so I'd be well ahead of the large cash pile. Two, I could have looked at my all-equity allocation there at retirement, and said to myself, "I need some bonds". That wouldn't have worked out so well, especially the last few years (tho the bond fund would have been in $, so that would have helped). So I could have done better, and I could have done worse.

That's all hindsight. Who knows what will happen next with equities, interest/exchange rates, bonds, deficits, inflation, wars, elections, etc.

Good luck!

[TokyoWart]

Thanks for asking the question; I read captainspoke's response with interest. I'm not quite retired but I don't think there needs to be a "bond" bucket per se. Personally I have almost no bonds beyond a tiny amount of US I bonds and some use of T bills for cash management to help time my quarterly US tax payments. My personal opinion is that government bonds now mostly have non-economic yields which have been artificially suppressed by central bank "quantitative easing" and governments forcing financial institutions to use government bonds to maintain larger risk capital than was required in the past. I aim to get around the need for a bucket that bridges intermediate term risk by having a stock portfolio that is large enough that dividends more than cover expenses and a cash cushion (including emergency fund) which could cover 2-3 years of expenses if I am careful. The risk I face is that dividends plunge (which they did in the Great Financial Crisis) but as that dividend income grows with my portfolio I can tolerate larger declines in dividends without dipping into the cash cushion. The other risk I face is exchange rate changes between the yen and dollar and I split my portfolio and expenses between the US and Japan to mitigate that.

[RetireJapan]

That's my plan, more or less. I'm working off the following numbers.

Necessary money (basic living expenses). Pensions should cover this for my wife and me.
Nice to have money (discretionary spending). We'll cover this from investments and income.

Bucket 0: income from various things (currently negligible, will work on building these up over time)
Bucket 1: cash savings (2+ years maybe?)
Bucket 2: bond funds (currently around 20%)
Bucket 3: world stock funds

I think this will give us a lot of flexibility in terms of not having to sell stock funds at really bad times

(*we're in the fortunate position of likely having more money than we need, this would look different if that were not the case)

[captainspoke]

Perhaps a little more...

I view the bucket 'system' in retirement as a guide to adjusting your asset allocation. Pre-retirement, a person may have opted for something like all equities, or some proportion of equites/bonds, perhaps also mixing in other things like cash, crypto, gold, commodities, maybe dividend stocks, and so on.

The buckets, 1-2-3, are a way to re-orient a strictly savings/accumulation/investment POV, to a view in which you will be spending down your assets. And the typical scheme for that, which I tried to repeat above, goes from short to long term, with different allocations for each, so that you are both protected in the shorter and mid terms, while maintaining some assets in the longer term bucket. Perhaps what chatGPT would recommend for a short, mid, and long term framework...!

But there are different paths to the top of the hill, and the basic framework of it all is really just a model framework scenario--a rule of thumb kind of thing that the writers of those articles on the bucket system have spun out (cautiously) so as to give some advice in an article, while trying to stay middle of the road, and avoid harsh counter-opinions in the comments sections, and so on.

In reality, there are many personal, individual scenarios, virtually none of which fit the norm. If you're unsure of things, not only on your own personal level but the world in general, then maybe following the 'standard' way that the bucket system as presented will work well for you, as a rule of thumb.

But there are so many other scenarios, depending on the usual suspects, as it were. You might be richer or poorer, retiring earlier or later, have more/less pension, minimal or much higher expenses, and of course your retirement goals/spending might be modest or outlandish. And many, many other factors.

Have a good look at everything, and work towards what makes you comfortable. Also, just a suggestion, be open to revision. Understand that your first decisions on this might be temporary (or that they may last for a long time), and that you might revise those in six months or 2-4 years. Go into those initial decisions with an awareness of possible future change, and know that changing/adapting later is not failure, it's just changing and adapting, and a normal part of things.

[Moneymatters]

Thanks for the thoughtful responses!

I think the fact that I’ll start with a stack of cash is steering my decision. I know it’s why I’ve not bothered with bonds so far.
(Another reason for keeping cash would be whilst it’s not invested it’s not exposed to currency changes.)

Captain’s comments on being prepared to change course resonate. Should I decide to keep cash I’ll document the events that would trigger considering another approach.