The Bucket Approach to Retirement Allocation

Here's your assignment: Gather up all of your retirement accounts and shape them into a portfolio that will supply you with the income you'll need during your retirement years. Oh, and one other tiny to-do: You'll also need to make sure you never run out of money, even though you don't know exactly how long you'll need it.

How we did it in days of yore

In the past, one simple and elegant solution to the above problem was to buy an immediate annuity that would pay you a stream of income for the rest of your life. But many investors don't like the loss of control that accompanies annuities. One other intuitively appealing idea is to sink your portfolio into income-producing investments such as bonds and dividend-paying stocks and live off whatever yield they generate. That way you might never have to tap your principal at all. The big drawback, however, is that you're buffeted around by whatever the interest-rate gods serve up. When yields are up, you're living high off the hog; when they're miserly, you have the unappetizing choice of scaling your spending way back or venturing into riskier income-producing securities to get the yield you need.

These days, we have another option

It's no wonder that so many retirees and pre-retirees have been receptive to another strategy: "bucketing" their portfolio for retirement. At its core, bucketing is a total-return approach in which you segment your portfolio based on when you expect to need your money. Money for near-term income needs is parked in cash and short-term bonds, while money needed for longer-range income needs remains in bonds and stocks.