Employment or business often offers a cushion from worrying about a steady source of income and the ability to continue working or switch jobs. However, uncertainty often comes with retirement. The primary challenges retirees face include calculating the income required for day-to-day expenses, the duration of available resources, market volatility, inflation, and a kitty for the beneficiaries from the pension and social security funds. The bucket strategy offers one way to plan retirement.
The bucket strategy works for retirees who seek to overcome the fear of overbalancing in the market. The financial advisor divides the income sources into three categories: short-term, intermediate, and long-term. Each category serves a distinct purpose, primarily cash flow safety nets in different parts of the retiree's life.
The short-term or immediate bucket holds the retiree's cash, social security benefits, pensions, and liquid investments. The latter includes short-term certificates of deposits, treasury bills, and high-yield savings accounts. The bucket contains items that retirees can easily convert to cash to reduce risk and ensure easy access to hard cash when the retiree needs to. A typical short-term bucket holds enough resources to cover the retiree's two-year expenses. When it runs low, they can replenish with dividends and returns from investments and other buckets.
The intermediate bucket contains the income the retiree needs for three to seven years and aims to ensure stability and continual income. The intermediate bucket is considered a medium-risk strategy. Too low a risk can expose the assets to inflation and gradual depreciation. At the same time, too high a risk can expose the portfolio to losses and inability to meet expenses.
The bucket ideally contains certificates of deposits, real estate investment trusts, longer-term bonds, growth and income funds, convertible bonds, and preferred stocks. The returns in this bucket should replenish the short-term ones.
Lastly, the long-term bucket, with a growth potential of over ten years, contains a diversified portfolio of domestic and international investments. From the three buckets, the long-term option contains the highest-risk investments designed to beat inflation in the long run, which would not be feasible in the short term. In a short-term scenario, the investments often fluctuate, exposing the investor to possible losses. However, the long-term option, beyond the decade, offers higher chances of a gain.
Financial advisors recommend retirees load the long-term bucket with options like real estate investments, cryptocurrency, individual stocks, and hedge funds. Other additions include peer-peer lending, venture capital investing, and IPOs. The income generated from this bucket should replenish the intermediate bucket.
The bucket strategy protects the retiree from market volatility as the fluctuations do not affect the cash flow. Also, through the tiered strategy, the retiree can allow for growth through future investments without jeopardizing short-term needs.
However, to use the bucket strategy, the retiree must have sufficient assets to fund the three buckets. The financial advisor assists with gauging eligibility and funding the bucket ratios. The intermediate and long-term buckets take time, the latter over a decade, so the retiree should be ready to change their lifestyle, reduce spending, and re-align retirement expectations for the strategy to work.
Also, while the financial advisor helps draft and advise on the bucket strategy for the retiree, the latter holds responsibility for asset allocation. The allocation refers to an investment strategy for dividing one's portfolio, like cash, and real estate, for diversity to balance the risks and rewards of each asset class.
Michael Keefe Gorman, a broker with Merrill Lynch, serves a geographically diverse group of individual investors, businesses, and non-profits from his office in Ithaca, New York.
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