Many people view retirement as a kind of finish line. They plan to save and grow their wealth up until they retire, and then will pull from that nest egg for the next several decades. While this strategy can be effective if you’ve built sizable retirement savings, it can also be intimidating.
Logically, pre-retirees understand that they’ll be spending down their wealth once they make the leap to retirement. However, this can be emotionally draining - especially if you’re particularly motivated by building your savings in the years leading up to retirement. Seeing your balance slowly decrease is a mental shift that many retirees aren’t prepared for.
Additionally, some pre-retirees don’t have a savings balance large enough to truly sustain them (and account for both inflation and unexpected expenses during retirement). If this is you, you may not be comfortable postponing retirement indefinitely just to continue saving.
The solution you may be looking for is to create “buckets” of savings to draw from at different points in your retirement. Each “bucket” will have a different portfolio allocation to align your risk with the associated timeline of needing those funds.
This way your savings can continue to accrue interest in the “buckets” you have that aren’t needed right away. Let’s talk about how this strategy works in practice.
A “bucket strategy” dictates that a retiree keeps their savings in three buckets:
Each bucket of your wealth is assigned a unique asset allocation. This way, you align the different “buckets” of your portfolio with a risk tolerance that matches when you’ll need to take withdrawals.
Each bucket of savings should be allocated a different way in order to extend the life of your savings and ensure that you won’t run out of money in retirement.
Your short-term savings bucket should be used for the first few years of your retirement. This savings bucket should be structured to be relatively low-risk because you need the funds right away. In fact, it’s often recommended that this “bucket” be funded solely by cash or a money market fund. These accounts won’t gain a great deal of interest, but they will be accessible when you need them early in your retirement.
In your mid-term bucket, you won’t be using funds right away. For this reason, you’ll want them to continue to accrue interest until you need them so that they can grow (at the very least to keep up with inflation). Money in this bucket is typically put in low-risk investments, such as bonds or bond mutual funds.
Finally, your long-term bucket should primarily be used for wealth accumulation. You won’t access these funds until later in your retirement. Therefore, you can take on more risk in this bucket than you would in your short and mid-term buckets.
You have more time to take advantage of capital gains, and to recover should the market experience any turbulence during your retirement. Your long-term bucket might be primarily invested in equities, in ETFs and mutual funds.
As you start to use each new bucket, you can reallocate the funds being used to be primarily cash or bonds. When you get closer to needing those funds, you’ll be rebalancing your portfolio appropriately to align your risk with your changing timeline for taking withdrawals.
Creating a retirement savings plan can be challenging. As you near your retirement, working with a fee-only financial advisor can help. Reach out to us today! We’re here to guide you to and through your ideal retirement.
Wood Smith Advisors, a woman-owned Registered Investment Advisor (RIA), is a fee-only financial services firm that partners with its clients to simplify their financial lives. We focus on women, entrepreneurs, and individuals with complex financial situations, providing objective and competent advice, education and services to help them develop and build their businesses and reach their financial goals. We can be reached by clicking here.
"Finance Made Simple" blog posts are intended for educational purposes and not for specific advice. Each person’s situation is different. Consult your financial advisor for advice relating to topics discussed.