Use Three Buckets For Retirement Planning
“Use this easy to understand approach to retirement planning to simplify your plan.” Bill Broich
When it comes to retirement planning, predictability is everything, this is especially true for those already nearing retirement age. Younger investors are generally more inclined to look for high-risk/high-yield opportunities where their money can grow as much as possible. Even if economic misfortune should befall them and they don’t receive the return on investment they expected, time heals all wounds. However, time is a precious thing and the interaction between time and money becomes even more important in old age. Seniors cannot afford to make mistakes when it comes to the rationing and distribution of their wealth. With age comes the urgent need to carefully plan and adopt investment strategies that provide for your income needs at different stages of your life.
The bucket method tried and true, accounts for three different time segments or investment time horizons. These are periods of time in which an investor expects to remain invested, that is until the money is needed. Several aspects must be considered when designing such a plan, this includes desired lifestyle, activity level, potential medical expenses, and care costs. Checking off bucket lists should be considered as well. Whatever a retiree’s goals are, surely maintaining a comfortable and fruitful life throughout the golden years is common to all.
How can the bucket method help achieve predictable and reliable retirement funding? Through the strategic use of different investment types varying in risk and liquidity, a retiree can plan for now, later, and much later.
- 1-5 years; cash flow
- 6-15 years; bonds
- 16+ years; stocks
In the first 5 years of retirement, an individual should rely on low-risk investments that account for their spending needs. A retiree needs to get income and cash flow out of their investment. Both things can be achieved using an income annuity. One of the simplest and most user-friendly annuities is the single premium immediate annuity (SPIA). A Single Premium Income Annuity is purchased for a lump sum and begins paying out immediately or within a year. Other income-producing assets include social security funds, money market funds, pensions, and CDs; all are investments that will not decrease in value.
In this bucket short-term growth is necessary. This is where a bond could make sense, but low-interest rates and bond yields are making market participation a more attractive option. With this option comes more risk than some may want. This risk can be mitigated with a variable annuity that guarantees a minimum accumulation benefit or minimum lifetime withdrawal benefit.
This bucket provides long-term growth for the future. These investments can stand to be a little more high-risk. Blue Chip Stocks, the S&p 500 stock index, and other popular long-term investments. Stock buying options in bucket three might make more sense in the large-cap category, such as Apple, Microsoft, and real estate. These are high returns (and higher risk), holding assets that won’t be needed until much further down the road to help offset inflation.
With longevity comes a higher risk of running out of funds. As a person ages, moving funds from the investment side to the “safe money” side makes solid money management sense. A great choice for Safe Money which also has income benefits is a Fixed Indexed Annuity. With this choice, income can be created that will last a lifetime regardless of how long a person lives.