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Is a Retirement Bucket Strategy Right for You?

Making your money last in retirement can be tricky, so it's worth asking if a bucketing strategy might help you address some of the biggest challenges you face. So in particular, we're talking about number one having the confidence to stop working and start spending. That can be terrifying even for those of you who are well prepared. You might have assets and a healthy income from social security and pensions, but still it's kind of terrifying to walk away from a job with a steady income and some nice health care. You might also need to invest at least some portion of your assets for long term growth, and that's because we all face the risk of inflation or rising prices over time.

So if your assets aren't growing then you may lose purchasing power over decades in retirement, and that can be a problem. Then a third issue is of course that sequence of returns risk, and this is when you are selling assets especially at the beginning of your retirement when markets are down, if there happens to be a crash at the beginning of your retirement years, if you're selling assets during that event it can really take a bigger bite out of your portfolio and increase the risk of you running out of money later in life, and we don't want that. So let's spend the next couple of minutes talking about retirement bucket strategies. We'll go over some examples, maybe look at how to start it and manage it over time, and then discuss if it's the right move for you. I will mention that I don't see a lot of clients using this beyond a two bucket approach, but it's still nice to know these concepts so that you can either rule it out if you're not going to use it or get some good ideas. Bucketing is also known as time segmentation.

In other words, you have different buckets of assets that you can pull from over different time frames, and the promise of this is that hopefully you would be able to avoid selling assets when they're down and you can be confident that you have the funds you need for your withdrawals and your spending. So you always have a cash bucket and this involves money that you might be spending next week or next month.

This is relatively safe money, and then beyond that you might have one or more additional buckets that are invested a bit differently, and we'll talk about that in just a minute. It's important for you to know that you can customize this in any way you want. We're just going to go over some examples that are concepts, but whether you use two buckets or three buckets or make the time frames different, maybe you want four years worth of cash for example, these are all things that you can customize to suit your preferences. One of the simplest approaches is a two bucket strategy.

So you've got just that one bucket for several years worth of spending. You might set aside enough cash to satisfy let's say one to three years worth of withdrawals if you needed to take money out of investments and you didn't want to sell investments because they're down perhaps. The second bucket is maybe a total return portfolio. It might be invested according to whatever is right for your risk preferences, your needs, and your tolerance, and you would know that given that you have some cash set aside you don't need to dip into that bucket for at least four years or so. Now keep in mind that this isn't rigid so you don't need to necessarily start by spending from your cash bucket.

If the markets are doing well and your investments are gaining value it might make sense just to spend from those investments and leave that cash bucket as is and it's there for if you ever need it. So if there is ever a market crash it is already loaded with cash that you can draw on and you can worry a lot less about what the markets are doing. So you can see some of the investments in bucket number one. These are cash equivalents basically it might even be in a savings account or CDs. You could look at T bills if you wanted and other types of things. Again this is up to you but the point is you might feel really confident if you have this money set aside. And by the way it's probably a good idea to start building up this cash bucket a few years before retirement so that once you reach day one of retirement you have this money set aside already. In the second bucket of course you have a diversified portfolio so that might be mutual funds and ETFs, maybe some individual stocks and bonds, whatever it is that you invest in according to whatever is appropriate for you as an investor.

So if that's a 60 40 for example you do that maybe you have more risk or less risk or alternatives or something else. We'll look at some deeper examples next but first I want to mention I'm Justin Pritchard and I help people plan for retirement and invest for the future, and in the description below you're going to find more information on bucketing, some resources from Christine Benz, as well as just some general retirement planning resources and information. I think you will find all of that really helpful so please check that out. And by the way it's just a friendly reminder that this is just a short video it can't possibly cover everything. You can still run out of money even if you use a bucketing strategy so triple check all of this with some professionals and be aware that there is always some risk and uncertainty in the retirement planning world. Now moving on to a three bucket example we have those same two buckets as before but we've added an income bucket so this is in between the cash withdrawal bucket and the longer term growth bucket.

You might prefer to set aside an extra bucket. I'm not sure that you necessarily need this bucket but you could include things that kick off higher levels of income perhaps longer term bonds and CDs maybe some dividend stocks if you have the appetite for that kind of risk and anything else that comes to mind that might help create some income that can go into bucket number one. If we look at this three bucket example depending on how you set it up you might have roughly or almost 10 years worth of withdrawals in relatively safe assets.

You've got a couple of years in cash so that's going to be really safe and then the income is a little bit more risk but not quite everything in the stock market like your growth bucket you could potentially pull from those assets for up to 10 years before you need to go and sell from your growth bucket and of course the past doesn't necessarily repeat, there are no guarantees but if we look historically there's a decent chance that you wouldn't be selling at least at steep losses and you might not be selling at any losses if you have a diversified portfolio over a rolling 10 year period, again can't predict the future, then if you really wanted to you could add more buckets but that really gets complicated, and speaking of complicated, let's get into bucket maintenance or bucket management.

This is really where you start to see some cracks in getting too complicated with this strategy or using too many buckets it's easy enough to design a bucket strategy in theory so you can set up the amounts you want and figure out how many years they should last and on your retirement date and in the early months you will have a lovely set of buckets, you've got the exact amount in each one and the investment mix in each one is exactly what you want, but at some point, life might happen, if you get into an extended downturn or even a flat market or if you have huge expenses that you didn't expect at some point we need to figure out how exactly you're going to be moving assets from one bucket to the next again when things are going well you're typically going to maybe just sell from those investment assets and not even use bucket number one the safe money you might just take profits off the top of whatever your growth investments are doing during the good times and meanwhile you might be sending income let's say dividends or capital gains payments over from the income and growth buckets into bucket number one and that can help to build that up or replenish it from any withdrawals that you might have taken but if you really start drawing from bucket one that safe bucket how exactly do we decide when and how to put money back in well one way is to use a systematic approach and that might be one example is going to be just every time period whether it's every six months every year you take some money out of the subsequent buckets and pull it forward into your cash bucket that can kind of defeat the purpose of bucketing because the idea is that you don't want to do things systematically you want to be more opportunistic and not just sell every six months but you want to avoid selling when investments are down to make a slight improvement on that you could look at a rebalancing strategy so you just take profits off the top of whatever did well and sell those assets and put the proceeds into bucket number one so if stocks did really well you're taking money out of stocks putting it into cash if bonds did really well and stocks suffered you would sell some bonds to get back into balance and then move that money over into the cash bucket you could also look at more opportunistic approaches and these border on market timing but you might say that maybe you have some rules you could say if something rises by more than five percent during a quarter or during a month for example you're going to sell some of that get it back down to a smaller proportion and take the sales proceeds put that into cash your bucket maintenance gets really complicated at some point especially if the markets don't behave so I would say you want to do a lot more thinking ahead and a lot more research if this is something you're considering look at some of the discussions with Christine Benz from Morningstar there are a number of those here on YouTube and she talks about that in more detail and proposes maybe some simplified ways of going about this which might take us right back to the two bucket approach really quickly how do you set this up in the first place well one way to do it is to use different accounts so your cash bucket is in cash and that might be in savings accounts CDs banks credit unions or even a conservative brokerage account then you might have your other buckets in different accounts and that way you can keep a balance of whatever the assets are in that account you can rebalance that account and the cash bucket is unaffected so it might make sense to do that but if you prefer you could do all of this in one account so for example you could have a couple of years worth of withdrawals sitting in cash or in a money market fund in a brokerage account then the subsequent money or the rest of the buckets would be in other investments inside of that same account ultimately this comes down to your preferences and what's going to be easiest for you to keep track of because that's really important you have to manage this over time it isn't just setting it up once and then letting it run you really do need to keep paying attention to it so I've hinted at some of the potential challenges here and I'm going to propose what I think is a simpler way of doing that and explain exactly why I think that but again it can be hard to manage this over time you don't always know what the next step is and so you might be kind of figuring things out and winging it as you go and that kind of defeats the purpose of setting up a structured process at the beginning if you aren't really sure what you're going to do with it as the years pass this can also be a cash heavy approach so you might have several years worth of withdrawals sitting in cash and that's not necessarily a bad idea but for some people given how everything is set up that can potentially mean that they don't have much that is invested for longer term growth so you want to think about that as you explore all of this and of course there are no guarantees so there could be extended draw downs that cause you to wipe out one bucket then the next and then get right into those growth assets selling exactly when you don't want to sell you can still have problems with this approach so what are some decent alternatives to bucketing you're obviously looking for a solution that can provide some peace of mind and give you a reasonable path forward as you figure out how to spend down the assets that you have one solution might be total return investing and that's where you just have a diversified portfolio that is tailored to your needs it has the right risk level and then a cash reserve so basically we're just talking about two buckets here if you want to look at it that way you've got a couple of years let's say worth of money in cash that can satisfy withdrawals during market downturns and the rest of it is invested I think you'll find that this functions similarly to what everybody thinks about as a bucket strategy so what you're doing with that approach is you want to keep the portfolio in balance so a couple of options number one is you can just sell what's been doing well and generate cash that's kind of like what we were talking about with bucketing or you might keep the portfolio in balance every six months for example or when it gets out of different tolerance ranges you might get it back into balance but effectively you're still selling your winners there and then putting it into the portfolio balance and then whenever you want to add cash you would just sell everything proportionally but you have been previously selling your winners to keep the portfolio in balance it's not exactly the same as a three bucket strategy for example but it can function somewhat similarly and another approach is to look at guardrails this is different than bucketing and looking at what to sell and when but it might be a different way to figure out exactly how much you can spend and avoid running out of money during retirement that's a topic for another video but it's something to look into if you're exploring these ideas so I hope you found this helpful if you did please leave a quick thumbs up thank you and take care.

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