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Protecting Your Retirement With the Bucket Strategy

| September 22, 2022
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Saving for retirement is a long-term endeavor. It’s not about finding the next hottest stock or getting rich quickly. This means that retirement requires a perspective on your wealth and income that accounts for your needs at different stages of your life, from the beginning of your working years through your retirement.
 
The Bucket Strategy is an investment strategy that separates your savings and investments into three buckets: the Risk Bucket, the Safe Bucket, and the Spend Bucket. Together, these buckets provide diversification of risk, but the key to the bucket strategy is the Risk Bucket funnels to the Safe Bucket, and then to the Spend Bucket over the course of your life as you age, and your risk tolerance decreases.
The Risk Bucket is for high-growth assets that may grow in value but could see significant pullbacks during a downturn. This bucket is usually favored when you have many years to recover from a downturn before utilizing your savings to cover your costs of living.
 
The Safe Bucket often refers to the assets you hold that may not have as great of an upside, but don’t have as much of a downside either. Depending on what your income goals and risk tolerance are, this bucket can provide you with dividend income or interest income that can supplement other forms of retirement income.
The Spend Bucket is the pool of money you use to pay for your costs of living. This usually consists of cash held in checking accounts, savings accounts, or short-term Certificate Deposit accounts (CDs). Social Security payments are also used in this bucket. During working years, this bucket is less of a concern, but come retirement, planning your income sources to fund this bucket is important.
To do the Bucket Strategy, gains from your Risk Bucket assets are withdrawn to your Safe Bucket assets at a rate that fits with your retirement timeline and risk tolerance. This allows you to build up your income-earning assets over time as your risk tolerance shifts.
The reason the Bucket Strategy may work well for retirement is that it’s built to weather downturns that are likely to happen throughout your life using diversification and timeline strategy. When a downturn occurs, it might affect your Risk Bucket the most, but because you either have time to recover or you’ve already built up a sizable Safe Bucket, the effects of a downturn are less than if you tried to time the market with one big transition from a risky strategy to a safe one. In addition, if you play it too safe and forgo your Risk Bucket, your savings can erode over time, not providing enough to retire on.

The Bucket Strategy is built to account for your needs at different stages of your life. But putting it into action is easier said than done. If you’re looking to build a retirement plan that’s structured to protect your savings and grow your savings over time, the Bucket Strategy might be for you. Get connected with our team today!
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