As you begin to plan for retirement, you will get several recommendations from financial consultants, friends, business colleagues, and your study. The one thing that all of these proposals have in common is the vast array of alternatives that it reveals.

The good news is that no matter what your situation, inclinations, or risk tolerance, you can structure your funds to help prepare for a pleasant retirement. The less fair consequence is that determining which one is best for you becomes difficult. The sheer amount of options may even be enough to paralyze one into doing nothing and postponing a retirement decision.

There are various potential approaches to this tough spot, and the 3 bucket strategy for retirement is one of many withdrawal techniques for investing and spending after retirement. This article examines how the 3 bucket strategy works for retirement and how it may alleviate concerns about not having enough liquidity, and we hope to clarify your thoughts on the subject.

What Is the 3 Bucket Strategy?

The 3 bucket method is an approach that involves splitting assets into short, medium, and long-term buckets to take advantage of the interplay between risk and reward while still implementing the principles of diversity and risk profiling inside your investment portfolio.

This technique was developed in the 1980s by financial planner Harold Evensky, who simplified personal finances by categorizing assets into two categories. Later, Evensky altered the concept by including a third bucket to give an additional layer of security or growth potential, depending on the person.

The 3 buckets are

• Emergency savings and liquid assets: A cash bucket containing financial vehicles that can help finance your short-term retirement lifestyle
• Medium-term holdings: A stable bucket including various income-generating investments to assist in providing some additional years of retirement income
• Long-term holdings: A growth bucket with the remaining balance which has the potential to be in engaged in more aggressive investments in accordance with your risk profile and desire for long-term growth.

Why Is This Strategy Vital?

This method is by no means a guaranteed thing. Any investment or transaction has some level of risk. However, if a crash occurs, it may cushion the blow. Diversifying your portfolio assets can help protect you from having to sell a long-term investment at a loss in the near term. This strategy can help avoid a situation where you need to liquidate your investments during a low market to pay your yearly withdrawals. You want to make money; not lose it.

The concept behind this technique is that you’ll have access to cash in the short term, which means you can feel more confident during time of volatility. Theoretically. Interest income, dividends, and the success of your assets replenish the buckets.

The 3 Buckets for Retirement Planning

• Emergency savings and liquid assets
  • The first category contains assets that generate income such as CDs, money market funds, US Treasuries, and fixed annuities. This bucket can be filled with investments that can be readily turned into cash. While generating interest on this money is enticing, the fundamental goal of this bucket is to reduce your risk and ensure that the money is there when you need it.
  • By allocating to this bucket, you may be able to use these in the short-term and periods of market volatility.
• Medium-term holdings
  • Looking a bit further into the future, this middle bucket covers costs from where the first bucket ends. Money in the intermediate bucket is intended for your short to medium-term goals. You should, however, consider avoiding investing in high-risk assets. Instead, keep it in a low-to-moderate risk category that has the potential to provide a reasonable return on your investment. That way, you could have enough money to live on.
• Long-Term Holdings
  • Bucket 3 is all on longevity, with the potential to be more aggressive in line with your risk tolerance and time horizon. Because the goal of this bucket is to help provide the strongest long-term return, it will need to be rebalanced regularly to protect the overall portfolio and to stay in line with your stated goals.
  • These are long-term investments designed to help you achieve potential growth as time goes on. Consider this bucket to be keeping assets you won’t need for at least seven years, and maybe up to 25-35 years.
  • Similarly, this section of the portfolio will have a significantly higher loss potential than Buckets 1 and 2. Buckets 1 and 2 are intended to help the investor from accessing Bucket 3 during a slump, which would otherwise convert paper losses into real losses.

The 3 Bucket Strategy Before Retirement

Throughout your working years, your primary focus will be how much money should go into each bucket and where the money will come from.

When you initially start employing the Bucket Strategy, your priority should be to fill bucket one, followed by buckets two and three. The amount you put into each will be determined by your retirement time horizon.

The closer you go to retirement, the you may be able to allocate to bucket 2. The more time you have, the more you may be able to allocate to bucket 3. When you’re 30 and under, you have plenty of time to accrue funds and ride market fluctuations; you may put 25% in bucket two and 75% in bucket three. At 50, you’re just two decades away from retirement, so splitting the buckets 50/50 may make sense. You’re approaching the minimal timetable for bucket three at the age of 60. A 75 percent allocation to bucket two and a 25 percent allocation to bucket three could make more sense at this stage.

Often the money for the buckets will come from standard retirement vehicles such as a 401(k), IRA, or Roth IRA. Oftentimes, you’ll contribute through withholding from your salary, preferably with some form of fund matching from your company.

Pros and Cons of the 3 Bucket Strategy for Retirement

Pros

• It guides in the regulation of emotions during periods of stock market volatility.
• This technique provides a road map that eliminates some of the guesswork in retirement income planning.
• This strikes a compromise between your need for development and your desire for consistent returns.

Cons

• This does not guarantee a successful retirement when it comes to investment there are always risks associated.
• Because this strategy depends on your specific situation and tolerance for risk, in the three-bucket method, you may need to regularly rebalance your portfolio to make sure it is still in line with your financial objectives.
• The retirement bucket technique suggests dividing your money into three buckets: short- term, intermediate-term, and long-term. This strategy is designed to help withstand short- term market declines, which can help prevent the need to sell to satisfy monthly needs. The approach, like any other, has flaws; nevertheless, other methods may be combined with this to build a strong retirement plan.

The retirement bucket technique suggests dividing your money into three buckets: short- term, intermediate-term, and long-term. This strategy is designed to help withstand short- term market declines, which can help prevent the need to sell to satisfy monthly needs. The approach, like any other, has flaws; nevertheless, other methods may be combined with this to build a strong retirement plan.

Securities and investment advisory services offered through qualified registered representatives of MML Investors Services, LLC. Member SIPC. [link to www.SIPC.org on electronic advertisements. 1000 Corporate Drive Fort Lauderdale, FL 33334. (954)625-1351 Asset allocation does not guarantee a profit or protect against loss in declining markets. There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio or that diversification among asset classes will reduce risk. The views and opinions expressed are those of Christopher Price. Christopher Price’s views are not necessarily those of MML Investors Services, LLC or its subsidiaries. CRN202403-2017145