When approaching retirement, it can be hard for the average person to know when or how to shift their strategy from long-term thinking to shorter-term thinking. While many investors just think about building an overall fund of money, there can be a better way to create a lasting income stream. One method that's caught many financial planners' attention is called "bucketing."
What is bucketing? And how can you follow this guide to build your own nest egg?
The Basics of Bucketing
Bucket-based investing is a way of planning for short- and medium-term investing goals as well as keeping an eye to what you leave behind. Three portfolios -- the metaphorical buckets -- are planned to house each of three different types of investment goals: income or cash needs for the immediate future, a medium-range bucket to produce income to use in retirement, and a long-term goal bucket designed to provide a legacy to leave to your heirs. By keeping each bucket separate, you can more easily understand and tailor it to each of your goals.
The first bucket is designed to take care of your immediate needs for the first 10 years of retirement as well as lump-sun needs (like college or moving expenses). This bucket should have the least risky investments and the most liquidity (the ability to turn assets into hard cash quickly). High quality, short-term bonds are a good choice for Bucket One because safety and ease are king, rather than higher yields.
Bucket Two is all about creating income and staying ahead of inflation. Bonds, income-producing real estate investment trusts (REITs) and dividend-producing stocks are a mainstay of this bucket. An inflation-fighting -- but somewhat conservative -- growth rate of 4% or 5% is the goal.
The third bucket is the one with the longest horizon and the most risk. This bucket is filled with riskier investments like equities (to produce a higher return) and long-term assets. As this bucket grows money, that growth is harvested and transferred into Bucket Two to replenish that. Bucket Two's earnings are then used to replenish Bucket One.
For many future retirees, the bucket method simplifies the conflicting needs and provides a more stable overall plan for the future. But it can be daunting to figure out how to create and manage these separate portfolios at first. If you're unsure if or how you should implement a bucket strategy, it may be wise to work with a qualified portfolio manager or financial planner. While you may have to invest some time and educate yourself about how to manage your money, the result will be a retirement income that lets you do the things you want to do when you begin to tap it.
To learn more, contact a company like Global Wealth Consultants LLC.