If you’re nearing or in retirement, you might have come across an article or two mentioning the “bucket strategy” for retirement planning. This strategy involves dividing your retirement savings into several buckets that have different time frames. Over time, you shift money from one bucket to another. The size of each bucket can vary depending on risk tolerance and income needs.
While this will be different for each person, below is an example of how a retiree with a portfolio of $2,000,000 that is 60% stock and 40% bonds might create buckets.
Bucket 1: $80,000 to cover one year of expenses: These funds would likely be invested in cash or cash equivalents and income needs for the current year come from this bucket
Bucket 2: $720,000 to cover the next 9 years of expenses: These funds would likely be invested in a mix of bonds that provide a steady yield. Between Buckets 1 and 2 you have 10 years of expenses invested.
Bucket 3: $1,200,000 invested for long-term growth: These funds would likely be invested in stocks that will hopefully appreciate over time.
Then you either systematically replenish the bucket, for example quarterly, OR you replenish the funds as it makes sense from a market standpoint if you are okay varying from your overall allocation. As with most portfolio strategies, you might need to lower your withdrawals at times to keep the buckets full.
Disclaimer: Alex Voorhees and Reston Wealth Management do not provide legal, accounting or tax advice. This information is not intended to be a substitute for specific individualized investment, tax or legal advice. We suggest that you discuss your specific situation with a qualified investment, tax or legal advisor. The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) or strategies may be appropriate for you, consult your financial advisor prior to investing. No strategy assures success or protects against loss. You should consider the investment objectives, risks, charges and expenses of any investment carefully before investing.