Wealth Management & Trust Update

The "Bucket Plan"

How can one manage their retirement assets so as to be confident of not running them dry? That is a tough challenge faced by all retirees. Morningstar columnist Christina Benz tackled the problem in the July 2018 issue of AAII Journal ("For Bucket Portfolios, the Devil is in the Details").

Step one is to determine what the spending plan is going to be and checking that it will be sustainable. The portfolio is going to have to fill in the gap between Social Security, pension, and annuity income and annual expenses. The general rule of thumb is that a 4% withdrawal rate will extend the life of the portfolio to 30 years or a bit beyond.

Benz then recommends that the portfolio be divided into three buckets. The short-term bucket will have cash and cash equivalents sufficient to cover about three years of living expenses. Into the intermediate-term bucket, three to ten years, one places bonds to provide a steady stream of income at higher returns than are available for cash. The third bucket will contain stocks and perhaps higher-yielding bonds. The time horizon for this bucket is 11 years and up.

From this portfolio one may plan to spend the portfolio income, draw down cash, or to raise funds by rebalancing the portfolio, reducing these allocations that have overperformed. The retiree needs to decide whether to become more conservative, more aggressive, or have a static risk posture as retirement progresses.

Many retirees have more than one account with retirement assets, some of which will be tax-deferred. For greater tax efficiency, Benz recommends relying on the taxable accounts for the short-term bucket and traditional IRAs and Roth IRAs for the long-term bucket. The intermediate bucket would be a blend of the two. 

But these are only generalizations and won't apply in all situations. For example, some retirees may want to make earlier withdrawals from their tax-preferred accounts so as to reduce required minimum distributions after they reach age 70 1/2. Taxable distributions may also be a good idea in years where there are significant deductions to offset the tax cost. On the other hand, in a year when tax bills are on the high side, tax-free withdrawals from a Roth IRA may be preferable.

The main take-away from articles such as these is that retirement income management is not a great job for the do-it-yourselfer. It's complicated, and the consequences of making a mistake can be severe. The advice of a financial professional can be worthwhile in this situation.

 

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