The Bucket Strategy

Written By Mason Stockham

The Bucket Strategy: An Intentional Way to Manage Retirement Income

A challenge many retirees face is managing their income in a way that balances liquidity, stability, and long-term growth. The Bucket Strategy is a structured approach that divides assets into different "buckets" based on time horizons and risk tolerance. This strategy can help retirees maintain financial security by ensuring they have short-term liquidity while allowing long-term investments to grow.

How the Bucket Strategy Works

The Bucket Strategy segments retirement savings into three primary categories:

1. Short-Term Bucket (0-3 Years)

  • Purpose: Covers immediate living expenses and emergencies.

  • Assets: Cash, money market funds, short-term bonds.

  • Objective: Preserve capital and provide liquidity to meet daily expenses while mitigating risk of market volatility.

2. Intermediate-Term Bucket (3-10 Years)

  • Purpose: Funds for expenses anticipated in the mid-term.

  • Assets: Intermediate-term bonds, conservative balanced funds.

  • Objective: Generate income with moderate growth while maintaining principal stability.

3. Long-Term Bucket (10+ Years)

  • Purpose: Growth for future financial needs and to combat inflation.

  • Assets: Equities, real estate investment trusts (REITs), other growth-oriented investments.

  • Objective: Achieve higher returns over the long term to ensure the portfolio sustains withdrawals throughout retirement.

Benefits of the Bucket Strategy

  • Mitigates Sequence of Returns Risk: By having a short-term bucket, retirees can avoid withdrawing from long-term investments during market downturns, with the goal of reducing the impact of poor market performance early in retirement.

  • Psychological Comfort: Feeling Confident that immediate expenses are covered can provide peace of mind, allowing retirees to remain patient with long-term investments during market fluctuations.

  • Structured Withdrawals: This approach offers a clear framework for withdrawing funds, aligning investment strategies with time-based financial needs.

Implementing the Bucket Strategy

  1. Assess Expenses: Determine annual living expenses, distinguishing between essential and discretionary costs.

  2. Allocate Assets: Divide retirement savings into three buckets based on the time frames and objectives outlined.

  3. Monitor and Rebalance: Regularly review the buckets to ensure they remain aligned with spending needs and market conditions. Replenish the short-term bucket by transferring funds from the intermediate bucket as needed, and similarly, refill the intermediate bucket from the long-term bucket over time.

Considerations

  • Individual Risk Tolerance: Tailor the asset allocation within each bucket to match personal comfort with risk.

  • Market Conditions: Stay informed about economic changes that may affect investment performance and adjust the strategy accordingly.

  • Professional Advice: Consult with a financial advisor to customize the Bucket Strategy to individual circumstances and to ensure it complements other retirement planning efforts.

Disclosure:

Advisory services are offered through Meridian Wealth Management, LLC, a Registered Investment Advisor. Readers are encouraged to conduct their own research and consult with a qualified financial professional before making any investment decisions.

MLA Citations

 

Mason Stockham
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