Approaching Retirement: Understanding and Instituting a Bucket Strategy

| September 15, 2014

savealittlemoneyWhen you first started planning for retirement, you may have tried to calculate a lump sum amount of cash you need to live off for approximately 20 or 30 years or longer. Even this cursory calculation can seem complex, but upon further reflection, you may have realized that your financial needs will not remain constant over the course of those decades you will spend in retirement. This realization can further complicate matters.

Reasons Your Budget Will Change in Retirement

If you are like many people, you may have plans to travel in your retirement years. You may want to invest in an RV or even a sailboat to tour the country or the world. Your travel plans may include time to visit the kids and grandkids with extended visits or time to cross off the places on your bucket list. Even if you do not plan to travel, you may want to golf or take up other expensive hobbies. You may be younger and healthier in the years immediately after retirement, and you may need to budget accordingly. In your later retirement years, you may decrease participation in these costly activities, but your healthcare expenses may rise. You may need specialized in-home services. Later, you may need to move into a retirement home. In addition, you may need to purchase a new car, make repairs to the house and more. The fact is that your budget at age 65 will likely not be the same as it will be at age 75, 85 or 95.

What Is a Bucket Strategy?

In your pre-retirement years, you may have selected investments with the intention of having long-term and short-term gain. Short-term investments may have been riskier with a higher potential yield, and long-term investments may have been selected due to their ability to add stability to your portfolio, to generate income at a later date and to accomplish other goals. You may have saved money to purchase a house, but you may have also saved money to put the kids through college or to accomplish other major goals. Just as you created these buckets of investments in your pre-retirement years, you can also follow the same philosophy for retirement planning. First, you will need to prepare budgets for different periods of retirement. There is some degree of speculation to this due to factors like your heath and economic conditions, but making and revisiting estimates will help you to stay on track as the years progress.

How to Plan for Different Stages of Life

While retirement is often viewed as a life stage in itself, you can see that retirement actually has different stages that must be planned for. Once you have your budgets prepared for the different stages, you can consider how you can position your investments to accommodate your income needs. For example, you may invest in real estate to produce income for travel during the first stage, but you may plan to sell these investments later to use equity for less risky income streams when you have higher medical expenses. Another idea is to use relatively safe dividend-producing stocks for income in your earlier retirement years. These may produce income while also increasing in value. They can be transferred to safer CDs and bonds during a second stage in your retirement years for less risky growth, and you can sell these assets to use as cash for the final stages of life.

Consider how you can establish these buckets initially to meet current income needs, but some buckets may need to be used for on-going gain. Keep in mind that some types of investments, like real estate and dividend-paying stocks, may produce income now and may continue to appreciate. With the right strategy and the use of the bucket system, you can be better prepared for all stages of retirement.

Information provided by WBLI Incorporated, a Halifax bankruptcy firm.


Category: Retirement

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