The Bucket Approach to Retirement Allocation

A diversified portfolio with various time frames can help you meet your income needs during retirement

Christine Benz 30 September, 2014 | 9:14AM
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Those who lived through the 1970s and '80s no doubt find their photographs from those decades to be cringe-worthy. But while few may wish to repeat a fashion era marked by pastel-coloured suits and big hair, one aspect of those bygone decades is appealing—substantially higher interest rates than those that prevail today. The average interest rate on a six-month certificate of deposit was 9.1% in 1970 and 13.4% in 1980. Of course, inflation was high then, too, but those higher rates, plus the prevalence of pensions, allowed many retirees to generate liveable income streams without invading their principal or taking risks in stocks.

But two decades' worth of declining interest rates have dragged yields way down, dramatically compounding the challenge for retirees. With infinitesimal yields on money market accounts and high-quality bonds, retirees' choices are stark: To be able to afford retirement, they can plan to delay the date, save more, reduce their standards of living, or take more risks with their portfolios.

The bucket approach to retirement-portfolio management, pioneered by financial planning guru Harold Evensky, aims to meet those challenges, effectively helping retirees create a paycheque from their investment assets. Whereas some retirees have stuck with an income-centric approach but have been forced into ever-riskier securities, the bucket concept is anchored on the basic premise that assets needed to fund near-term living expenses ought to remain in cash, dinky yields and all. Assets that won't be needed for several years or more can be parked in a diversified pool of long-term holdings, with the cash buffer providing the peace of mind to ride out periodic downturns in the long-term portfolio.

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About Author

Christine Benz

Christine Benz  is director of personal finance at Morningstar and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances.