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.