Could a retirement bucket strategy make it easier to manage savings after you retire?
If you think that managing retirement investments is difficult when you are working, we have some bad news: it gets much harder when you actually retire. Once retired, your investments need to not only grow but also fund your lifestyle and last as long as you do.
One method for balancing the desire for growth with the need for stability is a retirement bucket strategy. With this approach you establish different “buckets” or accounts for different types of spending.
- Invest some buckets with more risk in the hopes of more reward — for example, in stocks.
- Invest other buckets conservatively — in cash or bonds, depending on your time horizon.
Here are three common ways of setting up a retirement bucket strategy:
Retirement Bucket Strategy Based on Phases of Retirement — Risks and Time Horizons
One way of setting up a retirement bucket strategy is to think about different phases of retirement. You might establish three different accounts to meet your needs as you age.
Near Term: This bucket has funds that are sufficient to meet your spending needs and wants over the first five years of retirement. You want this money kept in cash or cash equivalents — little or no risk — because you need the money now or in the near future. This is not money that should be put at risk.
Years 6-15+: The second bucket holds monies to be used in years 6 — 15ish of retirement. This bucket is invested in things like fixed-income securities or investments with lower risk than stocks, but with some potential for growth. You can afford to take some degree of risk with this money, but not too much.
Longer Term: Your third bucket is invested in mostly equities. While stocks are thought to be a riskier investment, they are probably a good way to grow money that you will not need for a long period of time. You have time to ride out any volatility that this money experiences.