The Retirement Bucket Strategy is an investment and withdrawal strategy designed to provide retirees with a systematic approach to managing their income needs during retirement. The strategy involves dividing a retiree’s portfolio into different “buckets,” each serving a specific purpose and time horizon. These buckets are typically categorized as short-term, mid-term, and long-term, and they help retirees address both immediate and future financial needs while managing market volatility.
Here’s how to use the Retirement Bucket Strategy:
Assess Retirement Expenses:
- Begin by estimating your retirement expenses, including essential living costs, healthcare, and discretionary spending. Understanding your financial needs is crucial for determining the size and allocation of your buckets.
Determine Risk Tolerance:
- Assess your risk tolerance and investment preferences. The strategy involves different types of assets in each bucket, so it’s important to align the allocations with your comfort level regarding market volatility.
Create Bucket Allocations:
Divide your retirement portfolio into three buckets:
- Short-Term Bucket (Bucket 1): Allocate funds to cover the first few years of retirement. This bucket typically consists of cash, money market funds, or short-term bonds for liquidity and stability.
- Mid-Term Bucket (Bucket 2): Allocate funds for the next phase of retirement, covering 5-10 years. This bucket includes a mix of bonds and conservative investments to provide moderate growth and stability.
- Long-Term Bucket (Bucket 3): Allocate the remaining funds for long-term growth. This bucket consists of a diversified portfolio of stocks or equity investments.
Withdrawal Strategy:
- During the early years of retirement, primarily withdraw funds from the short-term and mid-term buckets to cover living expenses. This helps avoid selling long-term investments during market downturns.
- Periodically, during market upswings, replenish the short-term and mid-term buckets by selling investments from the long-term bucket.
Regular Rebalancing:
- Periodically review and rebalance your portfolio to maintain the desired allocation in each bucket. Rebalancing ensures that your portfolio aligns with your risk tolerance and adjusts for changes in market conditions.
Adjust Over Time:
- Adjust your bucket strategy as your retirement progresses, and your financial needs and circumstances change. Regularly reassess your portfolio and make necessary adjustments based on market conditions and your evolving goals.
Professional Guidance:
- Consider seeking advice from Matthew Jennings, JD, MBA, EA, RFC®, CEP®, CES™, aka Tax King Matt. He can help tailor the Retirement Bucket Strategy to your specific situation, provide insights into market conditions, and offer personalized guidance.
The Retirement Bucket Strategy provides a disciplined and structured approach to retirement income planning, aiming to balance short-term needs with long-term growth while managing the impact of market volatility. Regular reviews and adjustments are essential to ensure the strategy remains aligned with your financial goals.