Three buckets you say? Three buckets of … ? Three bucket retirement strategy.
We’ve all heard of the four percent rule and the buy less stocks, more bonds as one ages. The traditional four percent rule recommends that retirees liquidate no more than 4 % of their retirement portfolio per year; four percent is considered the “safe” rate.
However as the population ages and life expectancies increase, a retirement portfolio remains under pressure to fund a retirement which could easily last twenty to thirty years. Investment experts and financial planners continue to reexamine the four percent rule in relation to the life expectancy, cost of living, expenses and investments of their clients.
The three bucket retirement strategy continues to gain fans as it addresses the need for growth in a retirement portfolio along with the traditional financial vehicles considered safer and lower in risk. While at one time a safe investment vehicle was the CD with a four to five percent return, those rates no longer exist and those type of interest rates reappearance looks unattainable in the current economy or in the near future.
A thumbnail of the Three Bucket Retirement Strategy:
Funds for current year expenses which are not covered by income such as pensions, social security or part time jobs. It is recommended to set aside in total two years worth of living expenses in cash.
Short and intermediate term bonds, balanced funds with the dividends reinvested. Each year funds from bucket two are transferred to bucket one to replenish your cash.
A percentage of the remaining funds are allocated to stocks and higher risk bonds and mutual funds. These funds are to provide for growth and are earmarked “do not touch” for 10-15 years.
Categorizing The Retirement Bucket
Just as stocks, mutual funds and ETF’s are evaluated as aggressive, moderate or conservative. The three bucket retirement strategy can be crafted in the same manner. It is crucial an investor accurately evaluates their financial goals in relation to their tolerance of risk. It is also crucial your financial planner be on the proverbial same page as the investor so the strategy is reflective of the investors’ goals, portfolio and risk tolerance.
Jane Bryant Quinn, AARP financial columnist, Securing Income For Life