We have seen an increase in market volatility in early 2018. A steep pullback in stocks could be good news for working people who are building retirement funds, but those approaching or in retirement might be hurt.
One way that those nearing or in retirement could avoid risking their wealth to volatility is by implementing a so-called “bucket plan.” These plans vary, but the key to success is to have a substantial cash bucket. One common way to implement a bucket plan is for a retiree to calculate how much money he or she will need to withdraw each month from a portfolio to cover living expenses after retirement. The cash bucket, then, would hold at least a year’s worth of cash flow.
Setting up the cash bucket is just the beginning of a bucket plan. That bucket must be replenished so cash can keep flowing.
One way to do this is to divide portfolio assets into two broad categories: fixed income (mainly bonds) and equities (mainly stocks). At regular intervals, money can flow from the fixed income bucket into the cash bucket and from the equities bucket into the fixed income bucket. This allows stocks to be held for the long term, which, historically, has been a winning investment strategy.
The bucket plan described above is just one of many similar strategies. If a bucket plan strategy appeals to you as a way to address possible market volatility, our office can go over your plan to illustrate how various portfolio assets can be delivered to you as aftertax cash flow.