With so many retirement options—pensions, 401(k)s, profit sharing, Individual Retirement Accounts (IRAs) and Simplified Employee Pension Plans (SEPs), to name a few—planning for your golden years can be complicated and unexpected. While the mindless—and painless—process of contributing income into these investment streams is helpful for some, others prefer a more active role.
The bucket approach is one way to take an active role in preparing for life after work. The general idea is to create a list of buckets, usually three:
1) The Cash Bucket: In order to buffer losses from market downturn, investors save one to two years of living expenses and keep them relatively liquid.
2) The Bond and Balanced Bucket: This intermediate-term bucket consists mostly of bonds and balanced mutual funds.
3) The Risky/Rewarding Bucket: The stocks and higher-risk bond types in this bucket are in it for the long haul, aiming for big rewards with smaller investments.
The size and portfolios of the two investment buckets depend entirely on the time horizon and how much money a person wants or needs when they retire. Obviously, the closer a person is to retirement, the less risk they want to assume. On the other hand, someone with many years until retirement may want to focus less on cash savings in the front end simply because they need the liquidity to live the life they want now—with home purchases, travel and raising a family.
Here’s a great example of a portfolio created with the bucket approach.
There is no one way to maintain a bucket portfolio. As long as someone is attentive to the growth and funding of each of the buckets, and they’re meeting the end goal, any number of investment mixes can work.
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