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What is a Retirement Bucket Strategy?


What is a bucket strategy for retirement? 


And not the March Madness-type of buckets.  I am talking about retirement buckets.  I probably should begin by explaining the basic concept of buckets when it comes to retirement, just in case you don’t read the nerdy financial planning articles I do.

The basic concept of buckets is dividing your retirement assets into different investment strategies based on when and how much you will need to access for income in retirement.  For those assets you need to access sooner you are more conservative with the investments.  The buckets become more aggressive as you go out on the timeline of when you will need them. 

The bucket concept has been around for quite some time.  I was first exposed to it at my old firm, although the spreadsheets they used to run it had fatal errors.  I have corrected it in my bucket documents though. 

Most financial planners do not utilize buckets because I know of no decent financial planning software that runs on a bucket approach.  All the good software programs out there run based on the overall portfolio allocation, such as a 60/40 model.  Unfortunately, most financial planning software is designed for financial planners more than clients.  I know my clients like the bucket approach because it helps in volatile times like this.  Let me explain why.

Imagine you have three buckets.  The first is for money you will need to access in the immediate future, say the next two years.  This money will be very conservatively invested since you need it right away.  Bucket two may be for years three through eight.  This money should still be conservative, however, not as conservative as the first bucket since it will be a few years before you start accessing it.  The final bucket would be the most aggressive of the three, so this is where your equity exposure is higher.

Now, if you are in the bucket strategy and the market starts jumping up and down by 1-2% a day, or even hits correction territory (10% pullback), you may not be as concerned because you know the investments you need for the next 1-8 years will be more conservatively invested and the market gyrations have little impact on your first two buckets.  Yeah, your third bucket may be pulling back, however, you know it will be nearly a decade before you need to access this money.  The history of the market tells us the odds are good your third bucket will recover before you need to access it.

Bucket strategies work only IF you have a strong idea on what your retirement spending number will be.  You know I have harped on how important it is to know your spending number.  If I build out a bucket strategy because a client says they need to pull $30,000 out annually, but the real distribution number is $60,000, well, things can get rather ugly quickly.

I like the bucket concept because it makes sense for clients.  Also, it becomes easier for me to sell high and buy low to replenish buckets versus trying to sell for income needs equally across a 60/40 portfolio when the market is down.

Like just about every concept I cover, you do not have to be a Rocket Surgeon to execute your own bucket strategy.  There are lots of resources out there to explain the concept, although I have not come across any good spreadsheets.  Probably because of liability issues if they are not used properly.  Regardless, the retirement bucket strategy is an easy concept to understand and not too difficult to execute, but be sure to avoid any programs with fatal errors.