The ‘Bucket Strategy’ Every buyer should know
Building an investment nest egg is an important part of preparing for a comfortable retirement. But it’s also important to have some cash on the side to cover living expenses without needing to sell stocks. Doing so makes it easier to ride UPS and the stock market while covering important things.
A popular guide to having both is the “bucket strategy.” Read on for details on what this strategy entails and how to use it.
How the Bucket Strategy works
A bucket strategy usually includes three categories: short-term, medium-term and long-term assets. Cash is a short-term asset, because it is something you will use for everyday needs like groceries and gas. Bonds can be used as medium-term assets that offer fixed interest payments. Bonds in the Bouquet Strategy typically mature in three to five years.
Stocks build long-term assets in your portfolio and provide growth potential. Ideally, you won’t need to touch your stock market investments for at least five years.
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Bucket One: Your leading safety net
Income Safety Net covers living expenses so you don’t need to touch your nest egg right away. Every year that you can delay withdrawing money from your portfolio is another year giving your money time to compound.
Financial advisors often recommend an Emergency Fund with enough money to cover at least six months of living expenses. If you’re close to retirement, you might want to fill that fund up to a year or two — or more — of living expenses.
You can put this money in a high-interest savings account so it collects interest, giving you more short-term savings than you would get in a traditional savings account.
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Two and three buckets: Strength meets growth
The second bucket contains lower risk investments than the third bucket, such as bonds and development stocks.
The third bucket is usually made up of long-term growth stocks. Stocks tend to outperform bonds and can help keep food inflation away from savings. It is easier to stay invested in stocks if you have two other short-term buckets, because you should be forced to sell stocks during the correction to adjust your living expenses. Remember that this is a general guide, and these buckets should be made of materials that make sense for your particular financial situation and goals.
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To keep it balanced
The value of each bucket will change throughout the year as spending and inflation increase or decrease. That’s why it’s important to review your three buckets regularly – like once a year – to make sure they all have your goals.
Start by calculating how much you spend each year to get the money you need in your first bucket. Knowing this number can help you determine if you need to sell any stocks or if your income-generating assets are sufficient. If you have to sell stocks, starting with a loose position can further diversify your portfolio and reduce your bottom line if one of your stocks loses value in the next year.
It is also important to consider your risk tolerance and financial position. Diversification of natural stocks may make sense for one capacity, while building cash reserves may be a great option for another.
And you’ll have to look at how social security and interest reduce your cost of living as you account for your buckets. Some investors may choose to keep enough cash to cover annual expenses so that the bulk of their money can grow in a stock portfolio, while others may want to have more cash.
