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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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, Benzcreated 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.
Bottom Line
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.
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.
The buckets are divided based on when you'll need the money: short-term, medium-term, and long-term. The short-term bucket has easily accessible money, the medium-term bucket has money in things that generate income, and the long-term bucket has money in things that grow over time.
The conservative allocation is composed of 15% large-cap stocks, 5% international stocks, 50% bonds and 30% cash investments. The moderately conservative allocation is 25% large-cap stocks, 5% small-cap stocks, 10% international stocks, 50% bonds and 10% cash investments.
You generally want to keep a year or two's worth of living expenses in cash in retirement. Not having enough cash could force you to sell your investments at a loss, while stockpiling too much cash could cause you to miss out on further investment growth.
However, not a huge percentage of retirees end up having that much money. In fact, statistically, around 10% of retirees have $1 million or more in savings. The majority of retirees, however, have far less saved.
The 4% rule is a popular retirement withdrawal strategy that suggests retirees can safely withdraw the amount equal to 4% of their savings during the year they retire and then adjust for inflation each subsequent year for 30 years.
Conventional wisdom holds that when you hit your 70s, you should adjust your investment portfolio so it leans heavily toward low-risk bonds and cash accounts and away from higher-risk stocks and mutual funds. That strategy still has merit, according to many financial advisors.
There are no set ages to get into or to get out of the stock market. While older clients may want to reduce their investing risk as they age, this doesn't necessarily mean they should be totally out of the stock market.
Key Takeaways: The 100-minus-your-age long-term savings rule is designed to guard against investment risk in retirement. If you're 60, you should only have 40% of your retirement portfolio in stocks, with the rest in bonds, money market accounts and cash.
Using our portfolio of $400,000 and the 4% withdrawal rate, you could withdraw $16,000 annually from your retirement accounts and expect your money to last for at least 30 years. If, say, your Social Security checks are $2,000 monthly, you'd have a combined annual income in retirement of $40,000.
Yes, it is possible to retire comfortably on $500k. This amount allows for an annual withdrawal of $20,000 from the age of 60 to 85, covering 25 years. If $20,000 a year, or $1,667 a month, meets your lifestyle needs, then $500k is enough for your retirement.
How much does the average 70-year-old have in savings? Just shy of $500,000, according to the Federal Reserve. The better question, however, may be whether that's enough for a 70-year-old to live on in retirement so that you can align your budget accordingly.
While having a net worth of about $2.2 million is seen as the benchmark for being rich in America, it's essential to remember that wealth is a subjective concept. Healthy financial habits and personal perspectives on money are crucial in defining and achieving wealth.
Once you have $1 million in assets, you can look seriously at living entirely off the returns of a portfolio. After all, the S&P 500 alone averages 10% returns per year. Setting aside taxes and down-year investment portfolio management, a $1 million index fund could provide $100,000 annually.
Key findings. In 2022, the average (median) retirement savings for American households was $87,000. Median retirement savings for Americans younger than 35 was $18,800 as of 2022.
What is Triple Bucket Cleaning? A triple bucket cleaning method consists of three buckets, one dedicated bucket for sanitation, a second bucket for clean rinsing, and a third bucket for dirty rinsing.
With the bucket approach, investors divide their retirement assets into separate buckets of assets based on periods of time. Those time horizons can be flexible as can be the number of buckets, but three is a common choice.
The first bucket is predicated on expenses for the first three years of retirement and contains cash. The second bucket contains very conservative assets, “because they're up next,” Schoenhardt says. Bucket three is in growth and income investments, and four is more focused on domestic growth.
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