Saving for retirement is a long-term endeavor. It’s not about finding the next hottest stock or trying to get rich quickly. It requires a different perspective on your wealth and income that accounts for your needs in different stages of your life, from the beginning of your working years through your retirement. These five key components will help simplify the bucket strategy so you can understand it and apply it to your retirement strategy.
The Risk Bucket
The retirement bucket strategy refers to the idea that your retirement savings can be separated into three buckets, one of them being the Risk Bucket. This bucket is for high-growth assets that may grow a lot in value but could see significant pullbacks during a downturn. This is usually emphasized when you have many years to recover from a downturn before utilizing your savings to cover your costs of living in retirement.
The “Safe” Bucket
The “Safe” Bucket often refers to assets you hold that may not have a great upside but don’t have as much of a downside either. Depending on what your income goals and risk tolerance are, this bucket can provide you with dividend income or interest income that can supplement other forms of retirement income. With the Bucket Strategy, gains from your Risk Bucket assets are withdrawn to your “Safe “Bucket assets at a rate that fits with your retirement timeline and risk tolerance. This allows you to steadily build up your income-earning assets without having to time the market.
The Spend Bucket
The Spend Bucket is the pool of money you use to pay for your costs of living. This usually consists of cash held in checking accounts, savings accounts, or short-term Certificate Deposit accounts. Social security payments are also used in this bucket. During working years, this bucket is less of a concern, but come retirement, planning your income sources to fund this bucket is crucial.
The Importance of Balance
The reason the bucket strategy works well for retirement is that it is built to weather downturns that are likely to happen over the course of your life. When a downturn occurs, it might affect your Risk Bucket the most, but because you either have time to recover or you’ve already been funding your “Safe” Bucket, the effects of that downturn should be less than if you tried to time the market for one big transition from a risky strategy to a more conservative one. However, if you play it too safe, your savings will erode over time, not providing you with enough to retire on. Therefore, a strategy that is risk-balanced can help you achieve your retirement goals.
The Key is Time
The Bucket Strategy is built to accommodate your financial needs over a lifetime. When you’re young, you’re looking to grow your assets, and the Risk Bucket may be the priority because you’re able to work to earn your income. As you near retirement and asset preservation becomes more of a concern, the “Safe” Bucket help protects your income from the negative effects and short recovery time a downturn in the market might cause. And when you reach retirement, the Spend Bucket is there, still working in conjunction with the others, to provide income to support your other income sources.
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