THE BUCKET
Imagine what your ideal retirement will be. Perhaps you hope to buy a second
home in a warmer climate or travel around the country. Maybe you want to help
fund your grandchildren’s college education or leave a significant inheritance
to your loved ones. However, in the midst of planning your ideal future, fear of
outliving your money, the effects of inflation, and volatility in the market can
keep you awake at night. It’s important to develop a well-informed strategy to
accomplish your goals and minimize risk. With a simple strategy known as the
“bucket strategy,” you can organize and keep up with your financial plans to
fully enjoy retirement.
The bucket strategy is a method of prioritizing your retirement spending goals
based on their level of importance (such as needs, wants, and wishes) and
allocating your investment portfolio accordingly. For example, having enough
for daily living expenses is typically the most important goal and considered
a “need.” Buying a vintage sports car, on the other hand, may be of lesser
importance and considered a “wish.”
Once you establish your priorities, you can then review the timing of your
goals. Perhaps you hope to take a European vacation during the first year
of retirement, while your plan to make a charitable bequest will occur later
down the road. After you review the priority and timing of your goals, you
can organize your investment assets into separate “buckets.” Each bucket’s
assets get invested appropriately, taking into account the time until you need
the money, while still maximizing the potential for growth.
Consider the first bucket as the SAFETY BUCKET. This bucket
commonly holds one to two years of living expenses, less the amounts
received from Social Security and pensions. It can also include funds for any
expected expenses in the near future, such as an upcoming trip. The assets
in this bucket are kept in low- to no-risk savings vehicles, such as a checking
or savings account, money market, CDs, or short-term bonds. While there is
little potential for growth, the funds are available when needed.
SAFETY
LIFESTYLE
STRATEGY
The second bucket is your LIFESTYLE BUCKET. The funds allocated to
this bucket often include assets needed to fund living expenses throughout
retirement, future vehicle purchases, regular vacations, and occasional gifts
to loved ones. Often the largest bucket, these assets are invested with a
longer time horizon in mind. This bucket often includes a portfolio allocated
to both stocks and bonds to provide opportunity for growth and help combat
the effects of inflation. You can expect some short-term volatility in this type
of portfolio, but there is more potential for long-term growth. Negative effects
of short-term fluctuations are minimized because one to two years of living
expenses are set aside in the safety bucket.
The third bucket represents the ASPIRATIONAL BUCKET. The monies
invested in this bucket allow for passing down inheritance or charitable
bequests. It might fund the new sports car or some other “over the top”
expenditure. These are expenses that although “optional,” they would be nice.
Because the funds aren’t needed to meet living expenses, they can be invested
in a more aggressive portfolio. By increasing the stock allocation, the possibility
for higher returns increases, thus allowing for more money to leave to your
heirs. Alternatively, the aspirational bucket could have a more conservative
allocation since the funds are not needed for lifestyle expenses. This is where
the investor’s risk tolerance level can be factored in to the decision-making
process. And, the timing of your aspirational expenses matters.
Some have a fourth bucket called the SPECULATIVE BUCKET. If you
own a private business or invest in investment real estate or art, you have a
fourth bucket. This bucket might also contain non-diversified stock holdings
or other speculative investments you choose to own once the other three
buckets are sufficiently funded.
Stop imagining what your ideal future could look like and start
realizing it. Talk to your financial advisor about the necessary
steps to take when planning a bucket approach that works for you.
Utilizing the bucket approach can help plan for the important things
in retirement while minimizing risk, providing increased potential
for growth, and peace of mind along the way.
ASPIRATIONAL
SPECULATIVE