Investment Buckets During Retirement

How should I be invested during retirement? Where will my spending money come from? What happens if the stock markets go down? Are my investments safe enough?

Questions like these can be very confusing.

Let’s see if we can frame this topic in a helpful way.

Investment buckets

During, and approaching, your retirement years, it may be helpful to think about your investments as being in “buckets”.

Check out the diagram below:

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What does all that mean? Let’s dig in.

CASH bucket

The first bucket on the diagram is the CASH bucket. It contains your immediate and near-future spending, as well as your emergency fund. Therefore, you want to keep it safe; it needs to be there when you need it.

This bucket is mainly comprised of cash in checking and savings accounts, but can also include other safe, liquid options, such as U.S. Savings Bonds, bank CDs, and cash in brokerage/retirement accounts.

It’s usually best to keep between 1-3 years of spending in your CASH bucket.

1. First, your base should be your emergency fund. That is, the amount of cash you should have on hand for the “just in case” scenarios that inevitably arise from time to time. (Current clients: You may recognize this as being your suggested cash position from Fundamental #2 of the Five Fundamentals of Financial Health.)

2. Next, you should have enough in cash to cover your retirement spending for a period of time. This can be variable, depending on how aggressive you’d like to be. If you want to be aggressive and keep your money invested for as long as possible, you might just want 1-3 months' worth of spending at a time. If you want to be more conservative to make sure more of your money is completely safe, you might want to keep 1-3 years’ worth of spending in cash.

   • This is usually a variable amount, depending on the time of year. For example, if you decide you’d like to keep between 6-12 months’ worth of spending in this part of the bucket, you could do the following:

     • Take out a full year of spending from your investment accounts at the beginning of the year.

     • That amount will be spent down as the year progresses. At the end of 6 months, this part of the bucket will be down to 6 months’ worth of spending.

     • Then you take out another 6 months’ worth of spending in July, which will replenish this part of the bucket back to 12 months.

     • And so on every 6 months, which will allow this part of your CASH bucket to stay between 6-12 months.

   • Note: The term spending doesn’t need to include whatever you get from Social Security, pensions, annuities, or any other safe income sources. Really, it’s the amount of spending that needs to come from your investment portfolio.

3. Finally, you should keep in cash any extra amount you’ll need for short-term needs/goals, such as buying a new car or paying for a really big vacation.

You then take the sum of 1, 2, and 3 above, and that should be your CASH bucket.

CONSERVATIVE bucket

The CONSERVATIVE bucket holds investments that are more aggressive than cash, but still fairly conservative. Again, you want this money to be there when you need it in a few years.

This means it should be primarily composed of relatively-safe bonds and fixed income.

The graphic above shows that the spending for years 3-7 should be in this bucket, but it won’t be exact. It’s less about tying it directly to your spending, like the CASH bucket above is. Rather, it’s determined more by your financial life stage and specific investment risk profile.

Usually this results in the combination of the CASH and CONSERVATIVE buckets housing 40-70% of your investment portfolio. That’s a big range, but your exact number will be specific to you. It could even be higher or lower, depending on your particular circumstances and wishes.

Ideally, the investments in this bucket should transition to provide more and more income as you progress through life.

GROWTH buckets

The GROWTH buckets consist of the “Growth and income”, “Growth”, and “Global growth and small cap” buckets in the diagram above. A bucket of buckets, if you will.

Those sub-buckets would generally hold stocks and higher-risk bonds.

It’s the more risky stuff, with each sub-bucket getting more aggressive as you move along.

Ideally, the contents and relative percentages of these buckets should change as you approach and then go through retirement. Generally, it’s best to take more risk earlier in life, transitioning to less risk later in life. For example, the “Global growth and small cap” bucket would generally get smaller and smaller as you age.

(Note: The term “small cap” is short for small capitalization, and refers to the stocks of smaller companies.)

Although, again, your asset allocation could change depending on your particular circumstances and how you want use your long-term money. For example, if you’re very focused on providing a sizable inheritance for your children, and you have enough money to live on otherwise, you might want to focus more on higher-growth investments.

Taking a step back

I see this approach not as being prescriptive, but rather as being illustrative. The idea is not that you need your spending for years 7-13, for example, to consist of only “Growth and income” investments. In reality, things will be much more fluid than that.

But I do think this is a very helpful way to think about your investments and your asset allocation. It’s a great framing technique.

For example, if you’re going into retirement, you might be concerned about having much of your investment portfolio in stocks or other risky investments. After all, what if there’s a stock market crash? Will you need to go back to work? Will you starve?

The power of this illustration is that it shows how you’re somewhat insulated from a stock market decline.

Of course, a stock market decline will still hurt. There’s no denying that.

But even if stocks go way down, they will be housed in the GROWTH buckets. And as you can see from the diagram, you may not need to touch that money for something like 7 years. That will give the stock market a good amount of time to be able to make a comeback. And, in the meantime, you’re essentially living off the CASH and CONSERVATIVE buckets.

Summary

Thinking of your investments as being in buckets during retirement can help you keep perspective during market downturns. It can also help you understand where your short-to-medium term spending money is coming from, giving you confidence that it will be there when you need it.