Bucketing Approach to Retirement Planning for Public Service Professionals
There are many approaches to retirement income planning. One of my favorites is the bucketing approach. This is where you segregate your money into buckets or pots depending on your time horizon of when you need the money and your level of risk tolerance. This blog focuses on the bucketing approach and its specific application to public service workers.
A Simplified Example
Bucket 1 would contain cash or cash equivalents such as high-yield savings, money market funds, short-term CDs, and perhaps short-term treasuries. You will note that the money is very liquid without a loss of principal. This money can be used in the event of a market downturn. Because it is more short-term, the interest rate is not very high, but the risk of losing money is not there.
The interesting twist for public service workers is that they often get a monthly pension. This improves the success of the bucketing approach in retirement since you have an extra monthly income source to tap into upon retirement. As a result, bucket 1 might not have to be as significant.
Bucket 2 is more than 2-5 years of money that can be used for big purchases such as a new car. A remodel of your home or a new home, etc. Since the time horizon is more extended, perhaps adding some equity exposure makes sense. Maybe you could have a balanced portfolio or a more conservative income portfolio. Since the time horizon is shorter, less than half equity exposure would make sense.
Bucket 3 is more long-term money. For retirees, this could be the traditional 60/40 (stocks/bonds) balanced portfolio which has done well over time, or perhaps a growth portfolio of 70/30. The idea is that the time horizon is more significant than five years so that it can sustain an extended bear market. The bulk of your retirement money would be in Bucket 3. So it is essential to manage this bucket carefully.
How much would you keep in Bucket 1? Well, this is the most challenging choice to make. Bucket 1 is to meet your immediate needs. So having at least 12-18 months of living expenses in cash equivalents might make sense. The point is not to take the money from buckets 2 and 3 in a bear market since you will sell at a loss. Instead, take the money from bucket one until the market improves.
Of course, this is easier said than done! Many investors get anxious when there is a bull market and then have 18 months of cash sitting on the sidelines! So resisting temptation and understanding the purpose of the all-important bucket 1 is the key to a successful bucketing approach.
There are, of course, other approaches to retirement income planning. For instance, the 4% rule, in which you take up to 4% per year out of your retirement account. But the problem with this approach is that you will be removing money, perhaps at a higher rate than the returns during a market downturn.
So my preference is the bucketing approach since you use bucket 1 in market corrections. But, of course, there is no one size fits for the bucketing approach. Some want a large bucket 1, and others want a smaller bucket 1. This all depends on your level of risk and capacity for risk-taking, which should be discussed with a financial advisor before proceeding. A public pension makes the bucketing approach even more appealing, as you don't need to set aside as much money in bucket 1. The bucketing approach can be especially attractive to public service workers.
Reach out to me on the contact page below if I can help you understand how the bucketing approach will work for your retirement income planning.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on to avoid federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning should work with an estate planning team, including personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.