Retirement: A smart approach to ensuring cash flows

Aug 11, 2023

How does one use their investment portfolio to create a steady paycheck for retirement? I strongly recommend the Bucket framework cause it is simple and practical. It helps you understand, quantify and prioritise your retirement spending.

The Bucket concept is anchored on the basic premise that retirement assets need to be segregated on the basis of time. The idea is that you are thinking about your spending horizon and using that to structure the portfolio.

Assets that won't be needed for several years or more can be parked in a diversified pool of long-term holdings. Money for near-term living expenses ought to remain in very liquid debt instruments. This cash buffer provides the peace of mind to ride out periodic downturns in the long-term portfolio.

This has been pioneered by financial planning guru Harold Evensky, President of Evensky & Katz Wealth Management. While advisers may differ on the number of “buckets” required, Morningstar’s director of personal finance, Christine Benz, recommends three and explains her framework for the three portfolio sleeves.

  • Bucket 1
  • Horizon: Very short-term

The linchpin of any bucket framework is a highly liquid component to meet near-term living expenses for 12 to 24 months.

To arrive at the amount of money to hold in this bucket, start by sketching out spending needs on an annual basis. Subtract from that amount any certain, non-portfolio sources of income such as rental income or pension payments. The amount left over is the starting point for Bucket 1: That's the amount of annual income Bucket 1 will need to supply.

The goal is to stabilize principal to meet income needs not covered by other income sources. Keep this money very safe. From here you can step out on the risk spectrum. The investments can be an ultra-short bond fund, bank fixed deposit, savings account, short-term income fund.

  • Bucket 2
  • Horizon: Intermediate

If you have a time horizon of at least 3 years, up to 8 or 10 years, you can take a little bit more risk with that portion of the portfolio in the hope of earning higher return. So basically this segment contains at least 5 years’ worth of living expenses, with a goal of income production and stability. Thus, it's dominated by high-quality fixed-income exposure, though it might also include a small share of high-quality dividend-paying equities. Balanced or conservative- and moderate-allocation funds would also be appropriate in this part of the portfolio. Even a multi-asset fund.

Income distributions from this portion of the portfolio can be used to refill Bucket 1 as those assets are depleted.

  • Bucket 3
  • Horizon: Long term

The longest-term portion of the portfolio is dominated by stocks, equity mutual funds, and more volatile bond types such as credit funds. Because this portion of the portfolio is likely to deliver the best long-term performance, it will require periodic trimming to keep the total portfolio from becoming too equity heavy. By the same token, this portion of the portfolio will also have much greater loss potential than the other buckets.

Fine tuning the above…

There are various takes as to the tenure of each bucket. Some may feel that 24 months for Bucket 1 is too short and must go up to 5 years. And subsequently allocate 5 years to Bucket 1 and 5 years to Bucket 2.

Those portfolio components are in place to prevent the investor from tapping into Bucket 3 when the market is in a slump, which would otherwise turn paper losses into real ones.

Just ensure that withdrawals happen from Bucket 1. If the market is on a roll and your portfolio has performed spectacularly, you may pull out some money from there and transfer it to Bucket 1. Holding an adequate amount in safer, shorter-term assets can help ensure that you never have to raid those longer-term, higher-volatility assets when they're in a downturn.

  • The Bucket strategy prevents you from spending too freely.
  • It holds you back from cashing out of investments in reaction to short-term market volatility.
  • It gives you clarity as to what the assets are allocated for.
  • And presents a framework to manage retirement planning without fear.


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