Contributed by: Josh Bitel, CFP®
If you are in or close to retirement, you are probably concerned about the recent market uncertainty. You may be wondering how your investment portfolio can be structured to provide the income you need, without putting the portfolio in a vulnerable position.
The Bucket Strategy (not to be confused with the “Bucket List”) describes a cash distribution method to provide you with income from your portfolio during any kind of market cycle.
Consider that we have four buckets, and that every investment within your portfolio fits into one of these buckets. This strategy can provide cash needed in retirement, even if equity markets drop or stay low for extended periods of time.
The first bucket is designated for cash needs of one year or less. This bucket contains cash and short-term securities that mature in less than one year to support your needs for the next 12 months.
The second bucket starts generating cash flow in the 13-36 month range, or years two and three. This bucket contains short-term bonds and fixed-income type securities that have a small amount of volatility, but are primarily designed for preservation of capital. The holdings in this bucket will pass on interest income that ultimately flows into the first bucket.
The third bucket is structured to generate cash flow needs in years four and five, and primarily contains strategic income and higher yielding bonds (lower quality, longer maturing and international type bonds). However, they do pass on interest income that flows into the first bucket, much like bucket #2.
The fourth, and last, bucket is made up of equities (stock investments) and other assets that have higher volatility like gold, real estate, commodities, etc. Many of these assets will produce dividends to help replenish the first bucket, if the dividends are set to pay in cash and not reinvest. Ideally, when the market is volatile, as we’ve been seeing lately, this bucket is left alone to ride out the market cycle and replenish as we recover.
The Bucket Strategy is designed to provide enough cash flow to get through roughly a 6- or 7-year period without needing to liquidate the stock portion of the portfolio. This should provide you with the confidence (and more importantly, cash) needed to enjoy your retirement and start working on your Bucket List!
Talk to your financial planner to see how the Bucket Strategy might work for you.
Josh Bitel, CFP® is an Associate Financial Planner at Center for Financial Planning, Inc.® He conducts financial planning analysis for clients and has a special interest in retirement income analysis.