For as long as I can remember, investment professionals have used “buckets” to educate clients on and address a variety of financial issues. The American Association of Individual Investors (AAII) just dedicated another issue to “The Bucket Strategy” in their April 2012 publication.
Let’s take a look.
Buckets as an Income Strategy
“The bucket strategy will have buckets of funds designated for use in specific retirement time periods.” ~Noelle E. Fox
Most of these strategies utilize three buckets with the first being cash and cash equivalents to sustain you through the next 5 years. Due to no to low interest being paid on these reserves, many investors have lightened up this bucket. My typical client will have two years here now.
Bucket #2 is to be filled with assets appropriate for years 6-10. Or, in times like these, 3-7. Investments typically placed here will be fixed income securities including a variety of bonds and sometimes convertible securities, real estate investment trusts or large cap dividend paying stocks.
Although typically considered more conservative than stocks, these assets are subject to market, interest rate and liquidity risks and may not be suitable for all.
The 3rd bucket is for growth. These are the funds you won’t be needing for many years and are likely to be completely invested in stocks. The stock holdings here are varied between small companies, foreign and those with a good outlook for future growth.
Keep in mind that all stock investing involves risk including potential loss of principal.
Many studies in the area of behavioral finance indicate that investors and retirees often find confidence in a bucket strategy as it breaks the financial picture down into smaller pieces.
The bucket strategy has been around a long time and it does work for many; however, there are other methods. Systematic withdrawal from an actively managed portfolio is a common substitute to the bucket method. I’ve even been known to combine the two.
What’s important is that you understand the basic choices of drawing income and participate in the decision making process that will impact you. It’s not hard but it can be scary since no single strategy assures success or protects against loss.
Here to help,
Susan R. Linkous
Quote of the Week
“There is absolutely no inevitability as long as there is a willingness to contemplate what is happening.” ~Marshall McLuhan