Buckets of money: a retirement income strategy

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When you were saving for retirement, you may have pursued an asset allocation strategy that balanced your needs for growth, income and safety. You can take a similar multi-pronged approach to turning your nest egg into ongoing income.

One way to do this is sometimes called the “bucket” strategy. This involves creating multiple pools of money; each pool or “bucket,” is invested depending on when you’ll need the money, and each bucket may have its own asset allocation.

Buckets for your “bucket list”

When you’re retired, your top priority is to make sure you have enough money to pay your bills, including a few unexpected expenses. You need to be able to access this money easily and reliably.

Estimate your expenses over the next one to five years and set aside the total amount as your first “bucket.” Safety is your priority for this money, so it would be invested in extremely conservative investments, such as bank certificates of deposit, Treasury bills, a money market fund, or maybe even a short-term bond fund. You won’t earn much if any income on this money, but you’re unlikely to suffer much loss, and earnings aren’t the purpose of your first bucket.

Refilling the bucket

As the first bucket is depleted over time, it must be replenished. This is the purpose of your second bucket. This bucket has a longer time horizon, which may allow you to take on somewhat more risk in pursuing the potential for higher returns. With interest rates at historic lows, you might need some combination of fixed-income investments, such as intermediate-term bonds or an income annuity, and other instruments that also offer income potential, such as dividend-paying stocks.

With your first bucket, the damage inflation can do is limited, since your time frame is fairly short. However, your second bucket must take inflation into account. It has to be able to replace the money you take out of your first bucket, plus cover any cost increases caused by inflation.

Going back to the well

The primary function of your third bucket is to provide long-term growth that will enable you to keep refilling the first two. To fight the long-term effects of inflation, you’ll need investments that may see price swings, but that offer the most potential to increase the value of your overall portfolio. You’ll want this money to grow enough to not only combat inflation but also to increase your portfolio’s chances of lasting as long as you need it to. Also, if you hope to leave an estate to your heirs, this bucket could help you provide it.

How many buckets do I need?

This is only one example of a bucket strategy. You might prefer to have only two buckets — one for living expenses, the other to replenish it — or other buckets to address specific goals. A bucket approach helps clarify the various needs that your retirement portfolio must fill, and how various specific investments can address them.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016.

 

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