Timing Buckets for Retirement Planning

Retirement is one of the biggest transitions of someone’s life and naturally brings up a lot of questions. Generally, and for a lot of people, the most pressing question is whether their existing savings will be enough to provide them with the life they want after they finish working and for the entire length of their retirement.

The “Old School” way to invest for retirement was to shift from a mixed portfolio of stocks and bonds into a lower risk asset allocation, usually by increasing the percentage invested in fixed income like bonds and reducing their exposure to stocks. This lowered portfolio risk and volatility while also generating income cultivated from the interest received on bonds. Folks would then withdraw a set percentage every year (typically 4-5%), adjusted for inflation.

In fact, in the early 80’s, it wasn’t outlandish to think that you could comfortably retire on $500,000. Interest on 30 treasury bonds yielded north of 10%, meaning you’d be generating over $50,000 in income just off of interest alone. It was a great way to preserve principal and reduce portfolio volatility. Combined with social security benefits, someone would have been able to produce over $70,000 of income without putting any of their savings at risk. And that’s just for one person!

Needless to say, that’s not the case today.

A 20 or 30 year retirement is now normal – Meaning retirement savings have to last longer in an interest rate environment that is as low as we’ve ever seen. Does it make sense to invest in bonds and fixed income in this climate? Does it make sense to still employ a diversified portfolio of both stocks and bonds?

Thinking outside the box about investing and retirement may prove to be a better strategy than once thought. 

A Time-Based Approach

The first step of retirement planning, whether using a traditional approach or time-bucketing, is to set up a realistic budget. In order to accurately identify expenses, it’s necessary to put some thought to what you want your retirement to look like. Will it include downsizing from your current home? What about buying a second home closer to family? Maybe you want to find a cabin in the mountains for a place to create memories with your kids and grandkids? Whatever it is, a budget is essential and you should take the proper steps to understand the “day to day”. Once expenses are identified, you can see where you might be able to cut or reduce.

The time-bucket strategy starts by placing priority on your immediate needs while allowing money you’ll need in the future to continue to grow. The strategy splits retirement assets into three separate categories, dependent on when they’ll be needed:

·       Funds needed over the next three years (short term)

·       Funds needed 3-10 years (medium term)

·       Funds needed in 10+ years (long term)

For example, the money that you’ll need over the immediate future would belong in the first bucket. I like to put small house projects, bigger family vacations and gifts in this category.  Since these funds are for current needs, they would primarily be held in short-term, liquid investments that won’t be subject to market fluctuations.

The second bucket consists of funds that are needed over a three-to-ten year time horizon. For this bucket, preserving capital will be the main priority, but consider a specified amount to be allocated to investments that offer some growth. This bucket is often where some retirement income will come from, so the specific investments will reflect this.

For the last bucket, the goal is for these funds to continue to grow. Because they are reserved for the later retirement years, they’ll be able to potentially benefit from longer market cycles and will have more time to recover from unforeseen downturns.

The asset allocation for both the second and the third bucket will likely be some mix of bonds, stocks and alternative investments, and as always it should fit your risk profile. Just like during working years, the most important thing about investing in retirement is that it is a long-term approach while staying invested is critical to success.

Getting Started

One of the advantages of time bucketing your retirement strategy is that it puts a priority on developing a financial plan with your money.  By using the time buckets mentioned above, you have the opportunity to think about what your future expenses could be and what your retirement lifestyle will look like.

Again, having an understanding of expenses is an important piece of the strategy because it determines how much needs to be put aside in cash and how much to begin placing in other buckets.  Each bucket determines how funds will be invested so it’s crucial that the spending and withdrawal projections are accurate to avoid pulling funds from another bucket too early. No matter how much accurate the planning, however – unexpected things will come up. For this reason, it’s important to have an emergency fund with 3 to 6 months of expenses and build flexibility into the asset allocation in each of your investment buckets.

Conclusion

Time bucketing not only helps plan out an investment strategy that can help your retirement savings provide across an entire retirement, it can also spark a planning process that helps ensures retirement meets just as many life goals as the working years did.

As with all investment strategies, there comes a certain degree of complexity. Working with an experienced financial planner will bring clarity to your questions, be there as a guide through the execution, and ease some of the frustrations commonly felt in retirement.

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