Bucket Maintenance
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Bucket Maintenance
In the bucket approach to retirement allocation, we have the following:
Things To Know
- The bucket structure calls for adding assets back to bucket 1 as the cash is spent down.
- Bucket 1 is highly liquid, for immediate expenses.
- Bucket 2 contains five or more years’ worth of living expenses. It’s for the mid-term.
- Bucket 3 is heavy on the more volatile investments. It is for the long term.
How the maintenance would work
The bucket structure calls for adding assets back to bucket 1 as the cash is spent down. Yet investors can exercise a lot of leeway to determine the logistics of that necessary bucket maintenance.
The following sequence will make sense in many situations:
- Income from cash holdings in bucket 1. These will be of limited help in a yield-starved environment, but could become more meaningful when yields rise.
- Income from bonds and dividend-paying stocks from buckets 2 and possibly even 3. (Income-focused investors might decide that their bucket maintenance starts and stops with these distributions.)
- Rebalancing proceeds from buckets 2 and especially 3.
- Principal withdrawals from bucket 2, provided the above methods have been exhausted. Such a scenario would tend to be most likely in a 2008-style environment, when bond and dividend yields dropped and equities slumped, thereby making it an inopportune time to unload equities. (Such a scenario would generally be a decent time to engage in tax-loss selling, but the proceeds from that would be best deployed back into equities.)