What is the best method for providing for your retirement income?
When designing your personal retirement income strategy, a one-size-fits-all methodology can be hazardous to your financial well-being.
Should you have 50% of your investments in the stock market or should you be more aggressive? How much cash should your retirement assets possess? How much of your retirement assets should be in bonds?
You are an individual and taking advice for the general public is a mistake. You may or may not have a pension you can depend upon. Your Social Security monthly check may be all that you require or you may need to supplement that with your personal savings. Is longevity in your DNA or have your family members died at an early age?
These factors will determine how you should construct your assets in order to deliver the largest and most reliable method of retirement distributions.
At Retirement Solutions, we use a method that has been in existence for over 40 years and it is referred to as the 3 Bucket Methodology.
The first step in the process is to determine your in-retirement-income needs. If you are retired, you already know what that number is. If you are still working, constructing a budget will help you with this task.
How much to you keep in cash (Bucket #1)?
The idea behind Bucket #1 is to provide the amount of money that you will need over the next 12-24 months in cash. By doing this, no matter what may happen in the stock market, by having readily available cash, you can continue to pay your bills.
Besides everyday needs for money such as a mortgage, car payment, health insurance premium, food, etc., you should keep in mind emergency fund needs such as a new roof, car repairs, a new appliance, etc. This need can be part of Bucket #1 or can be set aside as a separate bucket.
How much do you need to keep in high-quality bonds (Bucket #2)?
Cash is good but historically, cash does not do well as a long-term investment. Inflation has historically eaten away at the return that cash provides which is why beyond 12-24 months, another type of investment is needed.
For years 3-6 that income will be required, you will need to step out on the investment risk spectrum to help improve your portfolio’s return and preserve your purchasing power.
Over longer periods of time, high-quality bonds have provided a better return than cash and they are quite reliable when it comes to investment risk. This bucket will be used to supplement Bucket #1 should that bucket need to be replenished.
At Retirement Solutions, we provide a specific bond allocation to each client’s needs. We match your investment risk and time horizon with the type of bond fund. We do not engage in cookie-cutter tactics. Each Bucket #2 is tailored to each individual client.
How much to you keep in stocks and other high growth investments (Bucket #3)?
The remainder of your investment portfolio (beyond 6 years), would go into carefully selected stock mutual funds. This bucket will provide you with the growth over time that will deliver the growth in your income that you will need over the next 10-20 years and beyond.
Bucket #3 will be the bucket that fluctuates the most in its value however, you have Buckets 1 & 2 to provide you with income giving Bucket #3 time to recoup any temporary declines that will occur.
As with Bucket #2, we carefully align a client’s investment tolerance with the investments that are invested in Bucket #3. Again, no cookie-cutter tactics are employed in this process. We align your risk tolerance with the investments.
Personal considerations and circumstances need to be addressed.
If you are very, very conservative, you might want to have more of your retirement assets in cash and/or bonds. This lower-returning, less volatile portfolio will necessitate a lower spending rate through your retirement years. There is no free lunch, more conservative, less growth regarding your investments.
Conversely, if you have longevity in your DNA, you may want to spend less as you will be living longer. And/or taking a more aggressive stance with your investments in order to provide for the longer time span that you will live.
Should you want to leave money to heirs, also consider a more aggressive investment scenario.
From which investments do you withdraw from first?
This can be a complicated question depending upon the different types of accounts you have for your retirement income. Are they tax-deferred such as an IRA or a 401(k)? Are they after-tax such as a taxable investment account outside of a retirement plan?
At Retirement Solutions, we have been providing retirement income advice for over 40 years. We have the knowledge and experience to help you establish a retirement income program that will provide you with the income that you will need over your lifetime.
Let us know if you would like to discuss your situation. There is no obligation and no cost to the initial consultation. We will ask you questions and listen to your answers and then let you know whether there is a good fit and whether it makes sense to move forward.
Simply click the “Schedule a Consultation” link in the upper right corner of this page. You talk, we listen.