How Gold Fits into a Retirement Plan
The three-bucket strategy is a popular retirement strategy that involves saving for short-, medium-, and long-term goals. For some investors, adding gold to the mix can allow for diversification and a hedge against inflation.
If you’re saving for retirement, here’s how to plug gold into a bucket strategy when you’ve never owned the precious metal before.
How does the bucket strategy work?
First bucket experts recommend that filling is a short-term saver. This often includes cash and other forms of money, such as certificates of deposit (CDs), which will help you pay for your everyday expenses, such as housing, gas and groceries. While financial advisors often recommend building an emergency fund that can cover your expenses for three to six months in the event you lose your job or incur unexpected debt, that timeline can be extended by one to three years for retirees. This is because when you retire you no longer have a paycheck to cover your living expenses, and you don’t want to be put in a position where you have to sell long-term assets during repairs and lock in a loss forever.
A secondary bond usually consists of income-generating bonds and stocks. Think of this bucket as cash that you may need in three to seven years.
The last bucket contains long-term growth assets that have time — like eight years or more — to offset volatility. You should not need to touch these stocks until then to give these stocks enough time to recover from the correction.
You can and should adjust the bucket strategy to suit your goals and risk tolerance. For example, it might make sense for your second bucket to include money you won’t need in three to five years, and your third bucket to have money you won’t need to touch for at least five years.
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Where gold comes in is the bucket strategy
Like stocks, the price of gold can fluctuate in the short term. This is why it should usually be given to your third bucket. Ideally, you won’t need to sell gold for a fixed number of years, giving you the flexibility to recover from market downturns.
Beginners may want to buy gold through exchange-traded funds (ETFs). These currencies are more liquid and less difficult to invest in than physical gold, which is less liquid and may come with additional costs, such as transportation, storage and insurance.
Although gold can be a valuable asset to add to your portfolio, you should not sell all your long-term assets to buy gold. It is important to maintain a well-diversified portfolio so that if one part of your portfolio underperforms, the other will hold steady or outperform. (Gold and stocks tend not to move in sync, which is why gold is seen as a good divergent.)
Experts generally recommend limiting your gold exposure to 5-10% of your overall portfolio. Beginners may want to start with a small portion and gradually accumulate gold leading up to retirement. See how much your gold portfolio is taking. If it increases in value, you may want to rebalance by selling some gold and investing that money in an underweight asset in your portfolio.
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Things to consider before buying gold
Before buying gold, it is important to assess your risk tolerance and financial goals. Ask yourself the following questions:
- What is your medium and long-term asset timing?
- How much money do you have to spend annually to cover expenses?
- Are you comfortable with the sharp price swings that gold may show from time to time?
- Do you prefer to keep physical gold or invest in a fund?
Keeping the buckets frame front and center can allow you to invest enough money in gold to make a profit without taking too much risk.
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