Are you retired or is retirement within sight? Congratulations! Now you can do all those things you have dreamed of doing in your leisure years – travel, spend time with family, volunteer, play more golf or pickleball, or try something new.
Up to this point, you have probably focused on growing your wealth, within comfortable risk boundaries. As you look forward to retirement, have you thought about how to structure your savings and investments for the next period of your life? Instead of growth, your goal may shift to income generation, or if you have sufficient other sources of income, you may want to reposition your investment portfolio allocation to reduce volatility. There is comfort in stability.
Let’s say that you need to generate income from your portfolio. How do you accomplish regular withdrawals without decimating your portfolio’s allocation? How can you structure your portfolio for a dual purpose – keep it growing and produce income? One option is a bucket strategy.
What Is a Bucket Strategy?
The bucket strategy for retirement investment assets was introduced by financial planner Harold Evansky. Financial assets are separated into three buckets – one bucket for emergencies with the primary goal being safety, one bucket to generate income for living expenses, and one bucket for long-term growth.
The National Council on Aging slightly adjusts the basic Evansky bucket strategy and suggests the following:
- Bucket #1: Cash flow
- Bucket #2: Transfer
- Bucket #3: Longevity
The first bucket is used to fund day-to-day living expenses. The third bucket is invested for long-term growth. The middle bucket is the go-between or transfer place to refill bucket #1 as it is depleted. Let’s take a closer look at each of these three buckets.
Bucket #1 – Cash Flow
The cash flow bucket holds income-producing assets and can be a combination of savings, portfolio investments, and other sources of income. This bucket might include CDs, savings accounts, money market funds, US Treasuries, pensions, annuities and Social Security funds – things that will not decrease or are relatively stable in value and are readily accessible when needed.
If you are comfortable with some fluctuation in value, short-term bond funds or ETFs might be included. Bucket #1 should generate enough funds to cover living expenses for 1-2 years. Then you won’t have to worry if the market or the economy takes a dip.
Bucket #2 – Transfer
The National Council on Aging calls this the transfer bucket, the go-between place. I like to think of it as an intermediate step. Investments that will withstand inflation and provide a moderate return are appropriate. It is important that these funds will be available as needed to replenish Bucket #1, but they are not expected to be needed for 2 to 7 years.
Longer term CDs, and intermediate-term investment grade bond funds and ETFs – Treasury, corporate, or municipal – within this time frame are possibilities. The Council also includes senior and junior notes, preferred stock, high-grade blue-chip (dividend-paying) stocks and perhaps high-quality real estate investment trusts (REITs) in their list of appropriate investments. “These are options that generally produce income and dividends, are considered reasonably conservative, and fairly liquid/marketable.”
Bucket #3 – Longevity
The longevity bucket is comprised of investments meant to keep you from running out of money as the years pass. Assets in this bucket won’t be needed for at least 7 years or longer. Stocks, high-yield bonds, real estate and other higher return assets may be appropriate in this bucket, according to the Council. The longer-term investments can help offset purchasing power problems related to increased longevity.
You may decide that you are comfortable taking more risk with Bucket #3 because you have set aside assets to cover expenses for up to 7 years. On the other hand, you may decide to keep the same risk tolerance and portfolio allocation as your pre-retirement portfolio.
The purpose of the three buckets is to give you comfort that your retirement living expenses will be covered, not only in the immediate future, but for as long as you live. The first step is to have a clear picture of your living expenses, including any special outlays you anticipate. Only then can you allocate assets to each of the three buckets. After your initial allocation, mark your calendar to review expenses annually and reallocate between buckets as needed.
If you want help to refine this strategy for your situation, please seek the help of an investment advisor who is a fiduciary. How do you find an advisor who is a fiduciary? Look for a Registered Investment Advisor (RIA) or a CERTIFIED FINANCIAL PLANNER® professional. You can search for an advisor in your area who is a CFP® professional at the following website: www.letsmakeaplan.org.
Let’s Have a Conversation:
How do you structure your finances? Have you used the 3 Bucket strategy? If so, was it difficult to set up? How is it working for you?
