One of the most important decisions you will make as you prepare for retirement is determining the best withdrawal strategy for your family’s situation.
One approach that has become popular is commonly referred to as the “bucket approach”.
This strategy divides your retirement savings into different investment buckets. Each bucket is then invested to meet different planned goals over various time horizons. The general idea is to set up three or more distribution “buckets,” with different asset classes and different time horizons for liquidation.
The purpose of the first bucket is to meet your cash-flow needs over the next 1-5 years and is invested in a very conservative fashion using assets like cash, CDs, treasury bills etc. This money is safe, reliable and liquid, and can protect your spending through the market cycle.
To determine the amount of money to hold in bucket 1, start by analyzing your spending needs on an annual basis. Once your annual spending needs are determined, subtract from that amount any certain, non-investment related sources of income such as Social Security or pension payments. The amount left over is the starting point for bucket 1. This is the amount of annual income bucket 1 will need to supply.
The second bucket is designed to meet your needs over the next 5- 10 years and this is typically invested with a more moderate level of risk. Ideally this money would be invested in high-quality bonds and a few conservative income producing/dividend paying stocks (an HCM favorite).
When you take a step back and look at buckets 1 & 2, it is comforting to know that the first 15 years of your retirement are accounted for with relatively safe income-producing assets so no matter what happens with the markets you have increased the ability to fund your need.
The third bucket, which covers years 11 and on, is typically invested heavily in equities and high yield bonds for long-term growth. This final bucket is invested to fund your longer-term goals. It is designed to provide long-term growth to combat inflation and to replenish buckets 1 and 2 when needed. An investment time horizon exceeding 10 years is a good amount of time for a well-diversified equity approach to generate a respectable return, and the idea is to harvest gains from this bucket over time and to extend the income portfolio’s time horizon with the proceeds.
The strategy you choose to create retirement income should be tailored to your specific lifestyle and financial goals. It should also balance the level of risk you’re willing to accept against the level of income needed. If you would like assistance formulating your retirement income strategy, please feel to reach out to your Hengehold financial professional.