Money cash Shekels currency 521.
(photo credit: Reuters)
One of the hottest issues in financial-planning circles is how to make sure
retirees don’t run out of money before they die. As more and more baby boomers
hit retirement, and with interest rates at recordlow levels, the question is how
can retirees generate the income they need to meet their expenses.
like to focus on a popular strategy used by financial advisors: the bucket
strategy. This strategy became mainstreamed after the book Buckets of Money: The
Ultimate Guide to Income for Life by Ray Lucia became a best-seller.
is not a review of the book. I liked the book and have used a variation of the
strategy for my clients for many years.
Conventional wisdom Common
financial-planning wisdom says that to generate your desired retirement income
you need to withdraw 4 percent from your portfolio each year. Let’s say at
retirement you have saved $400,000. Taking into account pensions, social
security, etc., you need another $16,000 to supplement your income. The common
wisdom would say invest 60% of you money in stocks and 40% in bonds, and based
on historical data this will generate the needed $16,000. The problem with this
strategy is that what may have been true 30 years ago, is irrelevant
Financial advisers love to trot out data and use fancy computer
simulations that say based on decades of data and running over 1,000
simulations, if you follow the above-mentioned allocation (60/40) you will have
more than enough money to live out your life. The problem is that 30 years ago
interest rates were double digits, and today they are close to zero. In
addition, these models use an 11% annual return on stocks as a given. Over the
last 13 years, stock-market returns have been nowhere near 11%
Due to today’s investing climate, the old-school conventional
wisdom has become very problematic. It’s very questionable whether retirees will
be able to achieve their goals by following the old strategy. This has led
advisers to look for new ways to help their clients generate the income
Fill your buckets The bucket strategy calls for investors to
divide their money into three buckets: a short-term liquid bucket; a slightly
higher-yielding mid-term bucket; and a more aggressive long-term bucket. Keep in
mind that there are many versions to the strategy.
When starting the
strategy, take a look at current market conditions and then set up the buckets.
Most variations call for each bucket lasting 10 years. Based on current
conditions, I would say investors will be better served to cut the first bucket
down to five years, and add the remaining years to the middle
Let’s go back to our example based on a $400,000 portfolio and a
65-year-old freshly retired individual. The investor would take $80,000 in the
first bucket and invest it in very liquid, very safe investments like CDs,
government bonds (inflation protected) and highly rated corporate bonds. It
would be set up so that each year $16,000 becomes free. Any money left after
five years would be transferred to bucket number 2.
The next bucket would
have $240,000 to start with. It again would be invested so that $16,000 comes
due every year for the next 15 years. Here a combination of highly rated
corporate bonds, hi-yield bonds, international bonds, preferred stocks and
government bonds would be used. The recent market rout has made preferred stocks
and foreign bonds much more attractive. The extra income generated from these
investments should help keep the value of the money versus inflation and leave
over money to be invested in the third bucket.
The third bucket is the
growth bucket. Here you have at least $80,000 that has been invested for 20
years before being tapped. Using a dividend-growth strategy and a mix of
international stocks has the potential, over 20 years, to appreciate
significantly. Keep in mind that international stocks, especially those in
emerging markets, have gotten hammered, again creating an intriguing entry point
for long-term investors. A 3.5% annual return will basically double the money
($160,000), and the hope is that after 20 years the market should do better than
3.5%. Even if it doesn’t, you will have 10 years of money to draw
You have now made it to 95 years old. We should all merit to live
120 years, but for financial planners, making it to 95 is considered a success.
This is a very brief synopsis of the strategy, so speak with your financial
adviser to see whether the bucket approach is right for you. But remember, past
performance is not a reliable indicator of future
Aaron Katsman is a licensed
financial adviser in Israel and the United States who helps people with US