3
Steps for Building a
Successful Retirement
Income Strategy
The most important goal in setting up a
retirement income plan is to make sure
your income lasts for the rest of your life.
You can achieve this using a total return
strategy called "The 3 Bucket Plan."
Below are 3 steps to construct your Bucket Plan.
Before you get started: Figure out your monthly income need
Think of this as your “portfolio paycheck”, income that your
investments will pay you to fund your retirement. As you are
evaluating your resources take into account any reliable
income sources you have like Social Security or pensions. Total
the monthly income that these reliable sources will provide and
subtract that from your total income need. The rest is what
your portfolio paycheck will need to cover.
Determine if your monthly withdrawal rate is sustainable
SPEND
If not, positive investment performance can build in
some cushion or in more turbulent market periods
you may need to spend less or work part-time to
cover the difference.
WORK PART-TIME
The generally accepted rule of
thumb is 4%. So, tally up the annual
value of those portfolio paychecks.
If they equate to 4% or less than
your total portfolio’s market value,
you should be in good shape.
To make sure your plan is sustainable you also should
take inflation into account. Assume your portfolio
paychecks will need to increase by 2% (the Federal
Reserve target rate) each year to cover inflation.
Step 1
Set up Bucket #1
This bucket should be an ultra-low risk investment like an
interest bearing checking account, savings account, CD,
money market fund, or a high quality low-cost “immediate
fixed annuity”. Go ahead and deposit at least one year’s
worth of living expenses here. This will be the source of your
“portfolio paychecks”.
Set up Bucket #2
Step 2
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This bucket will hold your living expenses for years 3 – 10 of
retirement. This bucket should be invested in a conservative
asset allocation portfolio like the RetirementInvestor.com
Conservative (40% equity) model portfolio of low-cost
exchange-traded funds (ETFs). This portfolio is designed to
earn a 5-6% average annual return. So, this bucket should
build in a cushion if you are using that 4% rule of thumb
when taking your portfolio paychecks.
YEARS
Step 3
Set up Bucket #3
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This bucket is for your long-term investments to fund
retirement years 11 and beyond. With this bucket you
can take a bit more risk like the RetirementInvestor.com
Aggressive (80% equity) model portfolio. This portfolio
is designed to earn an average annual return of 7-8%
over the long term, so this should further build an
additional cushion above your 4% paycheck.
Bucket Maintenance
You should plan to refill Bucket #1 annually by withdrawing money from Bucket #2. When
you take withdrawals from Bucket #2 you should take money from the funds in your
portfolio that have gone up the most, so in essence you’re rebalancing your portfolio.
RetirementInvestor.com makes this easy using its Rebalancing My Portfolio tool. You
should replenish Bucket #2 about every 5 years by using funds from Bucket #3. If you
do have additional income left over at the end of the year it can be deposited into
Bucket #3 to strengthen your odds of sustainability.
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In Conclusion
Using a segmented retirement income strategy of this type is beneficial in several ways.
First, it ensures that you are not taking withdrawals from a growth oriented portfolio (i.e.
Bucket #3) during negative market periods. Doing so may make it difficult for your growth
portfolio to recover. Second, it can help you stay invested during turbulent market periods
because the money you’re living off is in liquid, safe investments, and your growth
portfolio (Bucket #3) will not be needed for many years to come. Most importantly this
approach helps you stay invested, stay disciplined, and lets the markets work for you.
About Retirement Investor, LLC
TM
For more information, visit
https://www.RetirementInvestor.com
Media Inquiries:
Ryan Groves
Retirement Investor, LLC
[email protected]