Retirement Income – The Buckets of Money Strategy

“Buckets of money” has a nice ring to it, doesn’t it? It may sound like wishing to win the lottery, but it is a serious strategy for managing your retirement income.

With this strategy, you segment your retirement investment money designed for lifetime income into buckets of time, let’s say 5-year increments. So, instead of looking at retirement as this long 30-year block, you are breaking it up into smaller chunks of time. Using a bucket strategy helps you connect with time, relative risk, and an overall strategy for maximizing your retirement income.

So, let’s say you divvy things up in 5-year buckets. You are basically planning in terms of Now, Soon, and Later, managing risk as time goes on. The bucket of money for Now will be invested conservatively, but for the Soon and Later (and maybe even a Much Later) buckets, you have more time to handle potentially negative returns so the money can grow uninterrupted since you will not be taking distributions from it right away.

The first bucket is for years 1-5. This is money you will need immediate access to for living expenses, emergencies, and whatever extras you plan on. This money needed for income is invested in very conservative liquid investments since you will be using it as you go about living your full and interesting retirement life.

As you consider the second and each successive bucket, inflation should be something to consider. In the first bucket, inflation will not be much of a consideration, since the funds will be utilized right away. But the second and succeeding buckets should include investments in vehicles that act as a hedge against inflation. The longer you expect to live, the more you need to think about inflation. This means the Soon, Later, and Much Later buckets need to have corresponding growth components. You’ll want this money to grow enough to not only combat inflation but also to increase your portfolio’s chances of lasting throughout your lifetime.

How to Fill Your Buckets

The first bucket will be cash on hand. You’re looking here for safe investments that may earn a little bit of interest, but are there for you as ready money when you need it. What about the second bucket? Well, if you are a conservative investor, you’ll want it in relatively safe investments like mutual funds and bank money market accounts. Also, consider things like intermediate-term bonds, an indexed annuity or money managers that are tactical that can move to cash, but still invest in the broader market.

The third and successive buckets will be where you might have increased risk, but also increased potential to hedge against inflation. Though they may fluctuate, you want these buckets to grow overall so you can manage the lifestyle you want even as prices rise. This might be where you include instruments like stocks, ETFs, and real estate.

Dividing your assets into “buckets” sounds pretty simple and straightforward. But there are challenges. If you have focused your retirement savings in just a few vehicles, say a 401(k) or employer-sponsored plan, it can be a little confusing to now see the balance broken up into different investment strategies. Flexing between investment strategies and spending principles can be something of a psychological challenge. But if you prepare for this and plan ahead of time, a bucket approach can be a good way to keep money on hand when needed, but also grow the buckets of money that you won’t be needing right away.

Of course, the bucket strategy is just one of many. Over the past several posts, we’ve been examining different ways to handle retirement income. If you’d like to learn more about Systematic Withdrawal, Dividends and Interest or Flooring and Income Guarantee strategies, take a look at those posts and compare them to see what might be right for you.

Questions about how you should be planning for your retirement or structuring your retirement income? We would love to talk with you! Contact us here.