The bucket structure calls for adding assets back to bucket 1 as the cash is spent down. Yet investors can exercise a lot of leeway to determine the logistics of that necessary bucket maintenance.
The following sequence will make sense in many situations:
- Income from cash holdings in bucket 1. These will be of limited help in a yield-starved environment, but could become more meaningful when yields rise.
- Income from bonds and dividend-paying stocks from buckets 2 and possibly even 3. (Income-focused investors might decide that their bucket maintenance starts and stops with these distributions.)
- Rebalancing proceeds from buckets 2 and especially 3.
- Principal withdrawals from bucket 2, provided the above methods have been exhausted. Such a scenario would tend to be most likely in a 2008-style environment, when bond and dividend yields dropped and equities slumped, thereby making it an inopportune time to unload equities. (Such a scenario would generally be a decent time to engage in tax-loss selling, but the proceeds from that would be best deployed back into equities.)