Course 509: The Bucket Approach to Retirement Allocation
Bucket 2 and Beyond
In this course
1 Introduction
2 The All-Important Bucket 1
3 Bucket 2 and Beyond
4 Bucket Maintenance

Although retirees may customize different frameworks for the number of buckets they hold, and the types of assets in each, Morningstar’s Director of Personal Finance, Christine Benz suggests two additional buckets, as follows.

Bucket 2: This portfolio segment contains five or more years' worth of living expenses, with a goal of income production and stability. Thus, it's dominated by high-quality fixed-income exposure, though it might also include a small share of high-quality dividend-paying equities and other yield-rich securities such as master limited partnerships. Balanced or conservative- and moderate-allocation funds would also be appropriate in this part of the portfolio.

Income distributions from this portion of the portfolio can be used to refill bucket 1 as those assets are depleted. Why not simply spend the income proceeds directly and skip bucket 1 altogether? Because most retirees desire a reasonably consistent income stream to help meet their income needs. If yields are low, the retiree can maintain a consistent standard of living by looking to other portfolio sources, such as rebalancing proceeds from buckets 2 and 3, to refill bucket 1.

Bucket 3: The longest-term portion of the portfolio, bucket 3 is dominated by stocks and more volatile bond types like junk bonds. Because this portion of the portfolio is likely to deliver the best long-term performance, it will require periodic trimming to keep the total portfolio from becoming too equity-heavy. By the same token, this portion of the portfolio will also have much greater loss potential than buckets 1 and 2. Those portfolio components are in place to prevent the investor from tapping bucket 3 when it's in a slump, which would otherwise turn paper losses into real ones.

Next: Bucket Maintenance >>


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