Posted on February 17, 2022 in

Buckets to Weather Stormy Markets

With the new year well beyond us, the bull market of 2021 is a faint mirage in our rear-view mirror, and a slew of current headwinds lie before us on the road ahead, as we clutch the proverbial steering wheel ten and two.

For many Americans still working, we have no current or near-term plans of exiting the workforce. We still have several years ahead of us in which we will continue earning steady wages, all while placing more and more money towards our retirement. For this group, any current issues, though very real and worth understanding, the bigger focus is on maximizing savings for a future goal of an enjoyable and sustainable retirement. And thus, the ups and downs in the market should not be of much concern to this segment of Americans.  Further, if you are putting money away monthly, it would not be silly to be excited in a month when markets are lower, for you were able to buy more shares with less of your earned dollars. It is the soon-to-be retiree and the retiree, who should be thinking about how best to manage their plan during these times.

Retirees who plan to use their investable assets to offset a shortfall of income after taking into consideration social security and other steady sources of income such as a pension, will need to manage how best to spend their retirement nest egg. And while there is no one size fits all strategies, the bucketing/segmentation approach can provide real peace of mind when we are faced with uncertain market conditions.

Bucketing in its purest form is designed to segment assets based on purpose, income needs, and time horizon. Once retirement spending needs have been identified, you can lay out the proper spending buckets, the assets held in each bucket, and the amount to place in each bucket. Each retiree who chooses to use a bucket strategy should have an allocation that best fits their level of comfort and lifestyle, I will however speak in general rules of thumb to lay out the concept as clearly as possible.

Bucket planning will consist of 3 buckets not counting social security and pension benefits. The first bucket would be cash and cash alternatives like money market funds and ultra-short duration bond funds. The amount of money allocated into the ‘cash’ bucket should be two to three years of living expenses. Assets in this bucket won’t move much if at all in value, which is the designed purpose of this bucket. This bucket is intended to cover living expenses for periods of time when pulling from the other two buckets would be a drag on the overall portfolio due to poor performing markets. One additional area to consider for bucket one would be to also set aside an emergency fund beyond your annual living expenses, life happens whether we are prepared or not. It is ideal to prepare as much as we can for the unexpected. The final point on this topic is for those that have ample income from say social security and pension benefits, this bucket could be much lower than two or three years of living expenses.

The second bucket will hold mostly bond holdings. Two to five years’ worth of living expenses would be allocated to the bond bucket. Bonds historically have provided greater returns than cash while remaining reliable when held for the duration of the bond’s terms. Though I won’t go into detail on all the options to suit one’s second bucket, it is common to build out this bucket based on the bond’s duration, like a laddered bond approach.

The third bucket would be allocated towards holding equities and companies that are proven, over time, to provide on average three times the return of inflation. Being an investor in sound companies that have solid fundamentals, a history of growing earnings, positive operating cash flows, and strong balance sheets are largely the path towards sustained wealth accumulation. This equity bucket should have a good representation of quality companies that provide value to our daily lives, can pass along higher costs to the consumer, and can weather stormy market conditions. A great example would be quality companies that pay dividends to their shareholders.

After you have built out this strategy it must be implemented to benefit from the purpose of the bucket strategy. For the retiree who desires a monthly paycheck in retirement, we would look at the month-over-month returns in all buckets to determine where best to pull the funds from. In months where we have good market returns, we would use the third bucket. If markets are down one month, we would look at buckets one and two to supply the income for that month. On an annual basis, you will indeed need to rebalance and replenish your buckets. This strategy helps to minimize the risk of withdrawing from bucket three and in some instances bucket two of your portfolio in sub-optimal periods of time.

Bucket segmenting for your income and wealth management throughout retirement provides you peace of mind. Knowing what plan of action to take during volatile markets allows you to be in step with your financial plan.  Overall, it is easy to understand, and can be a huge help in staying the course for your overall long-term plan. There are many things to consider before implementing this type of planning strategy, and I would encourage you to spend some time with your advisor to come up with a plan that works best for you. Here at CPS Investment Advisors, we welcome you to visit us to discuss retirement planning strategies or anything else that may be causing you less peace than you deserve.

Eric J Jackson
Financial Advisor