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Maintaining Your Savings
Let's take a closer look at the Bucket Approach
for retirement income planning. Here's a refresher from our Winter 2017 Newsletter:
You divide your portfolio into buckets. We'll simplify the process and use three. One bucket is for
immediate needs and is invested in liquid funds, like cash. The second bucket is for
intermediate-term needs and is invested in instruments with a 6 to 10 year time horizon. The third is for
long-term needs and is invested with the expectation that the funds will not be needed for at least 10 years.
Below is a bird's eye view of the three investment-type buckets.
[These illustrations are hypothetical and are not indicative of any specific investment.
Your results will vary.]
You spend from Bucket 1. The goal is to reduce the likelihood that you will be forced to sell when the market is down, which may seriously impact the sustainability over time of the portfolio.
A major issue appears ...
How to Replenish Bucket 1?
You have lots of choices. Here are some of them.
A) Fixed method. Here you sell a preset percentage from Buckets 2 and 3 to generate the income needed to keep Bucket 1 full. The problem here is that in 2008 you would have sold stocks at the bottom, which is precisely what we are trying to avoid with the bucket approach.
B) Income method. Here you allow all interest, dividends and capital gains from Buckets 2 and 3 to flow into Bucket 1, thereby trying to keep it naturally full. The problem here is: will there be enough? Or too much?
C) Strict Constructionist method. Here you reinvest your dividends and capital gains during the course of a year, but also "rebalance" the portfolio at the end of the year and move your gains from rebalancing into Bucket 1. For example, Investment A, worth $10,000 at 10% of a $100,000 portfolio, grows to $20,000 and is now a larger percentage of the portfolio. You sell the gains, $10,000, and put them in Bucket 1. Then you have 1) maintained your original, carefully crafted allocation, 2) replenished Bucket 1, and 3) adhered to the basic "Sell High" principle.
Below is an example that begins with a $30K portfolio.
January 2018
| Position A |
$10,000 |
33% |
| Position B |
$10,000 |
33% |
| Position C |
$10,000 |
33% |
|
$30,000 |
|
| Position A |
$20,000 |
47% |
$10,000 gain |
| Position B |
$10,000 |
24% |
|
| Position C |
$12,000 |
29% |
$2,000 gain |
|
$42,000 |
|
$12,000 |
February 2019
after rebalancing, moving gains to Bucket 1
| Position A |
$10,000 |
33% |
| Position B |
$10,000 |
33% |
| Position C |
$10,000 |
33% |
|
$30,000 |
|
Back to more choices ...
D) Income Plus method. Allow dividends and capital gains to flow into Bucket 1 and if that is not enough, sell on a discretionary basis from Buckets 2 and 3 to generate what is needed.
 E) Elegantly Simple method.
Spend Bucket 1 until it is exhausted. Then spend Bucket 2 until it is empty, then Bucket 3 and so on. Something I really like about this strategy, in addition to its ease of administration, is that the portfolio maintains a higher level of potentially higher return instruments than the other strategies. This is because this Bucket 1, containing only short-term and cash-equivalent instruments, will be depleted after 5 years. This eliminates one of the problems with the bucket approach, which is that too much of your portfolio (Bucket 1) is invested in strategies with low return potential. Please note that with higher return potential comes greater risk.
Here's a very rough sample. $750,000 in portfolio, assuming no growth, starting with $250,000 in each of three buckets ...
|
Year
|
Bucket 1
|
Withdrawal |
Bucket 2
|
Withdrawal |
Bucket 3
|
Withdrawal |
|
Liquid
Assets
|
|
Allocated
Assets
|
|
Stocks
|
|
| 1 |
250,000 |
-50,000 |
|
|
|
|
| 2 |
200,000 |
-50,000 |
|
|
|
|
| 3 |
150,000 |
-50,000 |
|
|
|
|
| 4 |
100,000 |
-50,000 |
|
|
|
|
| 5 |
50,000 |
-50,000 |
|
|
|
|
| 6 |
|
|
250,000 |
-50,000 |
|
|
| 7 |
|
|
200,000 |
-50,000 |
|
|
| 8 |
|
|
150,000 |
-50,000 |
|
|
| 9 |
|
|
100,000 |
-50,000 |
|
|
| 10 |
|
|
50,000 |
-50,000 |
|
|
| 11 |
|
|
|
|
250,000 |
-50,000 |
| 12 |
|
|
|
|
200,000 |
-50,000 |
| 13 |
|
|
|
|
150,000 |
-50,000 |
| 14 |
|
|
|
|
100,000 |
-50,000 |
| 15 |
|
|
|
|
50,000 |
-50,000 |
I hope you can see that this is a challenging field of study, even for the professional. For greater benefit we recommend working with someone whose focus is retirement income planning.
Here's an
article
exploring the downside of the bucket approach:
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Thomas Phelps DeVol
is the founder of DeVol Insurance & Financial Services. He enjoys helping people transform their hopes about the future into attainable retirement plans. His persistence, know-how and diligence are the keys to his success -- and that of his clients.
Tom has three children and lives with his wife, Connie, and their youngest children in Newton, Massachusetts. He enjoys gardening, tennis, jogging and opera.
Tom can be reached at 617-964-6404 or via
email
.
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