How Do Buckets Work?
Rather than putting all of your money into one big nest egg, and then allocating your assets based on the “standard” method of figuring out how much you should have in stocks vs. bonds based on your age, the bucket method takes a look at where you are at in your retirement.
Basically, you set up three different buckets:
- Short-term: This is your first bucket. It contains liquid assets designed to sustain you right now. You can even include some income investments in this bucket in order to sustain your current lifestyle.
- Medium-term: When deciding what goes into this bucket, Forbes suggests that you look out between six and 15 years. Fixed income investments are great in this bucket. You get a measure of growth and income. I like to think that DRIPs would be useful in a medium-term bucket, just to help it grow.
- Long-term: This is a riskier bucket that is meant to help you grow your overall portfolio. This is money that you won't need for at least 15 years. The long-term nature of this bucket means that you can take a few more risks with your investments in the hopes that you can recover from losses.
Each of these buckets is created with your current needs in mind, and you can “pour” from one bucket to another as your retirement progresses. If you begin to run out of money in your first bucket, you re-allocate some of your assets from the second bucket. As you progress through retirement, you slowly move your assets from bucket to bucket, selling the assets in your second bucket to buy more liquid (and safer) assets that continue keeping your first bucket funded for your current needs.
As you move assets from your second bucket to your first, you will need to make sure that keep your second bucket filled. You can then sell some of the riskiest assets in your third bucket to buy a little less volatile assest for your second bucket. Hopefully, though, your second and third buckets will keep growing throughout your retirement, providing you with more to convert as you need to.
Understanding Your Investment Goals
I like the idea of cultivating multiple streams of income, too, so that you aren't as reliant on just what's in your investment portfolio. You need to understand your retirement needs, and then come up with a strategy to meet your goals.
That's one of the reasons I like the bucket strategy. One of the main points of the bucket method is that you need to know your investment goals, and have a clear idea of what you want your money to accomplish. Even if you don't move your assets from bucket to bucket systematically, or set up your buckets in a particular fashion, you should know what each group of assets is meant to accomplish toward making sure that you don't outlive your nest egg.