Bucket Strategy for Retirement Planning
There is a popular budgeting method known as zero-based budgeting. The premise is that your income minus your expenses should equal zero. That doesn’t mean you spend every dollar you make; that’s not much of a budget! It means that every dollar has a job, spending, saving, or giving.
There is a retirement planning strategy with a similar premise known as the bucket strategy. Each bucket has a specific job. We’ll look at how the bucket strategy works and why it can be a great retirement planning strategy in times of uncertainty.
What is the bucket strategy?
When you get close to retirement, one to three years out, your assets are split into three portfolios (the buckets). Each bucket has a different job, time horizon, asset allocation, and risk level.
Dividing your assets this way allows you to use some of those assets for income while other assets continue to grow.
The short-term bucket helps meet income needs not covered by other sources of income like Social Security or pensions and acts as your emergency fund in the first 1-5 years of your retirement. This bucket helps insulate you from market fluctuations and timing risks because the assets inside are conservative enough that they won’t be severely impacted during a market decline.
These assets should be relatively stable and can include things like money market funds, very short-term bonds, and short-term bonds.
The intermediate bucket provides income for years 6-15 of retirement. This bucket can be used to refill your short-term bucket if it runs out. The assets inside help protect your retirement against timing and inflation risk. The risk level for this bucket is higher than for the short-term bucket but lower than the long-term bucket. These assets can include dividend-paying stocks, individual bonds, bond funds, and laddered bond portfolios.
The long-term bucket provides income for years 16 and beyond. The assets inside protect your retirement against timing and inflation risks and can be part of your estate plan. The investments in this bucket have the highest risk level of the three buckets because their time horizon is longer than those of the first two buckets and have the best chance to recover from market down turns. Investments can include equities, commodities, and real estate.
The Bucket Strategy for Uncertain Times
Diversification is the tool we use to insulate our portfolio. By dividing your portfolio into three distinct buckets, you’re further diversifying. If the market falls during the first years of your retirement, you have money for your living expenses safely invested in your lowest risk bucket.
Meanwhile, your other two buckets have time to recover.
If you’re nearing retirement and would like to explore the bucket strategy, you can schedule a meeting here so we can ensure that you will Live the Life You Love during your retirement.