Every professional in this world has his visions and hopes for his retirement years. Realistically, not everyone can afford to leave everything and head out on a world tour. However, you can still create a comfortable lifestyle by organizing retirement money in the best possible way.
There are many types of retirement plans. You have the traditional 401k plans, IRA strategies, life annuity, and, of course, the bucket retirement strategy. It is a smart retirement approach that was mainly popular with investors but is slowly carving its way into a regular man’s life.
If you have a thing for investing, your retirement is already safe. Let’s explore more about a bucket retirement strategy and how you can plan one.
What is a Bucket Retirement Strategy?
A bucket retirement strategy is an income plan that divides your income into three different buckets. These buckets have a different timeframe, so you have a source of income at all phases of retirement.
The main goal of the bucket retirement strategy is to provide a stable income source while managing different risks associated with inflation, economic crisis, and even health. In a bucket retirement plan, your income will be divided into short and long-term finances based on different objectives, meaning that some of your investments will yield quick results while others may need time to reap benefits.
Components of a Bucket Retirement Strategy
The concept behind a bucket retirement strategy is quite simple. Your money is divided into three different buckets, and the income is generated at different time frames. Here are the bucket types:
Short-Term Bucket
The first bucket is known as the ‘liquidity’ bucket as well. It is designed to cover your basic income needs for a year or two. Short-term investments are available in the most liquid form. It means they are either in cash form or can be quickly converted into cash.
For example, cash itself, market funds, savings accounts, and short-term bonds are great examples of liquid buckets. These investments act as a safety net for people who want extra cash. Consider it your emergency fund.
Intermediate-Term Bucket
The level two bucket is also known as the intermediate-term bucket. It provides an income source for the next five to ten years. The second bucket allows investors to take risks and explore their options with bonds and stocks. Real estate investment is also a reasonable option to manage an intermediate-term bucket.
Long-Term Bucket
The last bucket in the bucket retirement strategy is your long-term bucket. These investments grow over the longer term, typically in over ten years. This is basically the money you invest, preferably with the advice of a fiduciary financial planner, and forget. With a long-term investment, you can combat inflation over the years.
How Bucket Strategy Protects You Post-Retirement?
Let’s face it. Every economy in this world experiences a downturn. It is normal for people to save up for retirement only to end up in inflation, yielding no benefits. Having your income distributed into different buckets ensures you have multiple safety nets to avoid going bankrupt.
Moreover, depending on your budget, you can put more money in the buckets to expand your investment/income sources. Smart retirement strategies allow people to take risks without going overboard.
A bucket retirement strategy might be conservative for some people. For instance, if you put most of your money in the first and second bucket, the third bucket will take quite a while to grow. Most people hesitate to invest in a third bucket because the return might outlive them. It is mandatory to seek professional financial help when allocating your assets.
How to Plan a Retirement Bucket Strategy?
The best way to plan a retirement bucket strategy is by hiring a finance professional to give you insights and guidance. However, if you are looking for a general idea of self-initiation, this short guide will help you plan a bucket retirement strategy yourself.
1. Find Out About Your Income and Expenses
The first step towards a successful retirement bucket strategy is understanding your income and expenses. Calculate your regular income sources and consider the primary, secondary, and tertiary costs over a specific period.
Think about your income. Is it enough to cover your monthly expenses, or do you fall short in case of a fluctuation in market trends, i.e., inflation and economic crisis? Are there expenses that can be controlled? Do you have any savings that can be invested?
2. Evaluate Your Risk Tolerance
Once you have a detailed overview of your income and expenses, it’s time to evaluate risk tolerance. Risk tolerance identifies your ability to take investment-related chances for a more stable retirement. People with a higher income are naturally open to more risks and are willing to take on more chances. Conduct a risk tolerance assessment to gain a better insight and overview of your situation.
3. Create Buckets
Next, you need to divide your savings into three buckets, as discussed above. Most people like to save a more significant chunk for long-term investments as it’s easier to save yourself from any instant loss. You can also keep in mind your current financial condition. For instance, investing in the first bucket is helpful if you are looking for instant funds. The second and third buckets come in handy when you decide to retire fully and no longer work.
4. Review and Adjust
Once all your resources are invested, periodically review your buckets to understand how they align with your retirement goals. Are the stocks you invested in yielding the expected dividend? Is the bank transferring your fixed deposits as planned? Is your investment in real estate finally looking promising? If you feel any discrepancy of deviation from the initial plan, do not hesitate to adjust the buckets accordingly. Remember to seek help from a financial advisor for the best options.
Final Thoughts
A bucket strategy is an investment plan in which a person invests money in three different tiers for short-term, intermediate-term, and long-term investments.
The bucket retirement strategy creates different income pools, so the retired person has access to money at all times.
You can seek help from finance advisors or fiduciary planners to help streamline your retirement goals.
