Retirement Income Strategies: The Bucket Approach and Alternatives

Various strategies exist in retirement planning to manage income streams. One established method is the "bucket strategy," which involves segmenting investment portfolios into distinct categories based on time horizon and purpose. While some retirees still utilize this strategy, it's important to understand its mechanics, potential drawbacks, and alternative approaches.

The Bucket Strategy Explained

The fundamental principle of the bucket strategy involves creating tiered investment portfolios:

• Bucket 1 (Spending): Designed for immediate income needs, this bucket typically holds liquid, low-risk assets such as high-yield savings accounts and short-term (1-3 year) Certificates of Deposit (CDs). Income for living expenses is drawn from the savings account, which is replenished as CDs mature.

• Bucket 2 (Intermediate-Term): This portfolio, often composed of quality intermediate-term bonds, serves to replenish Bucket 1. As CDs in Bucket 1 mature, funds from Bucket 2 are used to reinvest in new CDs, maintaining the short-term liquidity.

• Bucket 3 (Long-Term): This bucket consists of a diversified stock portfolio, potentially mirroring the risk profile of the intermediate bond portfolio in Bucket 2. Its purpose is to provide long-term growth that eventually flows into Bucket 2.

  
  

Proponents of this strategy often appreciate its organizational aspect, sometimes establishing separate accounts for each bucket. Some individuals find this structure helps maintain spending discipline.

Disadvantages of the Bucket Strategy

Despite its intuitive appeal, the bucket strategy presents several potential downsides:

• Account Proliferation: This approach can lead to a greater number of accounts, potentially complicating tax reporting for the investor and estate administration for heirs and executors.

• Rebalancing Challenges: With stocks and bonds typically held in separate accounts, the process of rebalancing the overall asset allocation becomes more complex.

• Tax Inefficiency: The segregation of assets can hinder the implementation of tax-efficient strategies, such as asset location, where different asset classes are held in the most tax-advantaged account types.

  
  

An Alternative Approach: Integrated Asset Allocation

An alternative to the bucket strategy involves a top-down asset allocation across the entire investment portfolio. Often, this results in a target allocation such as 60% stocks and 40% bonds (or 50/50), excluding any immediate cash reserves. Instead of compartmentalizing funds into buckets, this method involves managing a unified portfolio and rebalancing as needed to maintain the target allocation. This approach can lead to a consolidation of accounts. Income can be systematically drawn from the overall portfolio and deposited into a spending account, either regularly or on an as-needed basis (e.g., annual replenishment).

The Importance of Emergency Funds

Regardless of the retirement income strategy chosen, maintaining a separate emergency fund is crucial. The appropriate amount will vary by individual circumstances, but a general guideline is to have sufficient liquid funds to cover potential major unforeseen expenses, such as significant home repairs, vehicle maintenance, or unexpected medical costs. For many retirees, a range of $50,000 to $100,000 may be adequate for this purpose.

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Disclaimer

Investment advice offered through Stratos Wealth Advisors, LLC, a registered investment advisor. Stratos Wealth Advisors and Synergy Wealth Management are separate entities. 

Stratos or Synergy Wealth Management does not provide tax or legal services. Please consult legal or tax professionals for specific information regarding your individual situation.

Content in this material is intended for general information purposes only and should not be construed as specific investment advice or recommendations for any individual.  Please contact your advisor with any questions or for specific recommendations regarding your own circumstances. Investing involves risks including possible loss of principal. There can be no assurance that a specific strategy will yield a profitable result or protect against losses.