There are many different approaches and strategies for retirement investing that might appeal to you. But how do you tell if a certain strategy works for your situation?
When evaluating different approaches, consider how each strategy is put together and determine whether it fits your individual needs, resources and risk tolerance. If you’ve ever been interested in what’s called “bucket strategy,” you’re in luck – Morningstar has put together three specific examples of bucket strategy for you to check out.
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Bucket Strategy Basics
If you’re not familiar with bucket strategy, it calls for structuring your retirement assets in three buckets based on longevity and when cash is needed.
The first bucket holds your cash, cash equivalents and other liquid assets designed to be used in the first years of retirement. A medium-term bucket is focused mainly on bonds. A third, long-term bucket of stocks is designed to promote growth. As the cash bucket becomes depleted, medium-term assets are sold to refill it, with long-term assets liquidated to top off the medium-term bucket.
“The bucket approach to retirement portfolio planning isn’t designed to generate the best possible investment returns,” Christine Benz, Morningstar’s director of personal finance and retirement planning, writes. “It won’t – almost by definition. Instead, the bucket strategy is geared toward real retirees, to help them source their needed cash flows regardless of what’s going on with their long-term holdings.”
How to Set Your Asset Allocation Using the Bucket Strategy
Using the bucket strategy, Benz created three model portfolios for various risk tolerances. The three approaches rely on exchange-traded funds (ETFs) kept in tax-deferred accounts, with withdrawals being used to cover some or all of a retiree’s living expenses. The portfolios range in risk from aggressive to moderate to conservative.
Here’s how the three model portfolios stack up against each other based on how they allocate their assets across cash, bonds and stocks:
Aggressive. Designed for a retirement that’s expected to last more than 25 years, this is for investors with a high capacity for risk:
Cash: 8% of assets are kept in cash for years 1 and 2 of retirement
Bonds: 32% of assets are kept in bonds for years 3-10 of retirement
Stocks: 60% of assets are kept in stocks for year 11 and beyond
Moderate. Designed for a retirement that’s expected to last between 15 and 25 years, this is for investors with a moderate capacity for risk.
Cash: 10% for years 1 and 2 of retirement
Bonds: 40% for years 3-10 of retirement
Stocks: 50% for year 11 and beyond.
Conservative. Designed for a retirement that’s expected to last fewer than 20 years, this is for investors with a low capacity for risk.
Cash: 40% for years 1 and 2 of retirement
Bonds: 48% for years 3-10 of retirement
Stocks: 12% for year 11 and beyond
In terms of customizing the strategy, a lot will depend on the level of spending in retirement but the cash bucket is the focus since it serves as the padding to insulate against market shocks. An investor with low spending who might withdraw just 3% to start, could fund an aggressive portfolio with just 6% of their holdings in cash. Typically, however, retirees tend to spend more in the first few years of retirement and then slow their spending as they reach retirement goals and as they age.
The bucket strategy is an intuitive and relatively straightforward approach for spreading your assets across cash, bonds and stocks in retirement. Morningstar has three model portfolio asset allocations you can use depending on your risk tolerance and how long you expect to live in retirement.
Tips for Managing Your Portfolio
A financial advisor can help you select investments, rebalance your holdings when necessary and manage your tax liability. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
SmartAsset’s asset allocation calculator can also help you determine how to spread your assets across stocks, bonds and cash based on your risk tolerance.
While rebalancing can bring your portfolio back into alignment with your risk tolerance, keep costs in mind. Can you cover the fees you might have to pay upfront for purchasing a new asset or selling off current investments? It’s also wise to examine the expense ratio of the securities you’re interested in. This number indicates the percentage of your assets that are used to cover management fees.
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