In partnership with

Retirement Download

Strategies for a successful retirement

Retirement: A Shift from Accumulating to Spending Assets

When planning for retirement, we often envision a life filled with new adventures—whether it's traveling the world or diving into hobbies we've long put off. But along with these exciting possibilities comes an essential psychological shift: transitioning from saving and accumulating assets to spending them. This shift can be a major adjustment for many, as the strategies that worked for accumulating wealth may not be as effective when it comes to using that wealth in retirement.

Exploring Withdrawal Strategies Beyond the 4% Rule

While the traditional 4% rule for retirement withdrawals has long been a guideline, it’s far from the only strategy available. Just like no two retirements are alike, withdrawal strategies should be personalized to fit the unique circumstances of each individual. One such strategy gaining attention is the bucket approach, which organizes retirement assets into different “buckets” or asset accounts, each designated for a specific time period of your retirement.

The Psychological Benefits of the Bucket Approach

The bucket approach offers not just financial benefits, but also psychological reassurance. By having separate funds allocated for specific retirement periods, you can feel more secure knowing that you have assets dedicated to covering your short-term expenses. This approach provides a sense of stability, although it cannot guarantee you will have enough funds to fully realize your ideal retirement.

How to Define Your Buckets

The core of the bucket approach is to divide your retirement assets based on different time horizons, typically broken into three segments. Though the number of buckets and their time frames can vary, three buckets are the most common.

For example:

• Bucket 1: 0–5 years

• Bucket 2: 6–10 years

• Bucket 3: 11+ years

Alternatively:

• Bucket 1: 1–3 years

• Bucket 2: 4–7 years

• Bucket 3: 8+ years

These buckets are flexible, and some retirees may wish to adjust the number of years each bucket represents, particularly if they are planning for a long retirement. As more people live into their 90s or beyond, the third bucket may contain a larger share of assets to ensure that funds last.

Filling Your Buckets: Asset Allocation by Time Horizon

To get started with the bucket approach, calculate your retirement expenses and allocate enough funds to cover your short-term needs. This includes an emergency fund for unexpected expenses, such as healthcare or family emergencies. You can then invest each bucket according to its time horizon:

• Bucket 1 (Short-Term): Focus on liquidity and low risk. This bucket could include cash, money market funds, or a ladder of certificates of deposit (CDs) to ensure ready access to funds.

• Bucket 2 (Mid-Term): This bucket might contain a mix of bonds and income-generating equities, which are still relatively low risk but may offer some growth potential over the medium term.

• Bucket 3 (Long-Term): With a longer time horizon, this bucket can be more aggressive, investing in stocks or other growth assets that can ride out market fluctuations over time.

By allocating assets according to the timing of your needs, you’re less likely to be forced to sell long-term investments in a market downturn, ensuring you have the necessary funds for short-term needs without jeopardizing your future.

Understanding Timing Risk and Sequence of Returns

When applying the bucket approach, it’s crucial to be aware of sequence of returns risk, which refers to the potential negative impact of market downturns early in retirement. If your portfolio suffers significant losses at the start of retirement and you need to withdraw funds while those assets are underperforming, you might sell more investments than planned, accelerating the depletion of your nest egg. This could also leave fewer assets to benefit from market recoveries later.

However, if a market downturn occurs later in retirement, you may not need to draw on your portfolio as heavily, leaving you better positioned to ride out market cycles.

How the Bucket Approach Can Mitigate Timing Risk

The bucket approach provides a buffer against sequence of returns risk. By keeping a portion of your assets in low-risk, liquid investments (like cash equivalents) in the first bucket, you can meet your immediate retirement expenses without needing to sell stocks or other growth assets during a market downturn.

Consider filling your first bucket with one year’s worth of expenses in cash, and then a few additional years’ worth in high-quality cash equivalents. This gives you the flexibility to weather market volatility while waiting for investments in the longer-term buckets to recover. With this setup, you can avoid selling long-term investments in a downturn and maintain your financial stability during challenging times.

Conclusion: Crafting a Retirement Strategy That Works for You

The bucket approach is just one of many strategies available to retirees, but it offers an organized, methodical way to ensure your assets are appropriately allocated across your retirement years. By separating your funds into distinct buckets based on time horizon and risk tolerance, you can feel more confident in your ability to cover short-term needs while letting your long-term investments grow. While no strategy is perfect, the bucket approach can help provide peace of mind as you navigate the transition from accumulation to distribution.

Here’s a great video on retirement for people struggling to retire:

Sponsor:

Think your employer’s life insurance has you covered? Think again.

Most workplace plans fall short of long-term needs, leaving potential gaps in protection. By supplementing with a term life insurance policy, you can ensure your family’s future is truly secure. View Money’s Best Life Insurance list to find coverage starting at just $7/month.

Click here and take the first step today.

Resources

Calculators - Retirement, Budgeting, Investing

Make Money in Retirement

Stock Deep Dives

👩🏽‍⚖️ Legal Stuff
Nothing in this newsletter is financial advice. Always do your own research and think for yourself.