According to a study released in the Journal of Population Ageing, retirees are twice more likely to report depressive symptoms than those still working.
The CDC also reports that the suicide rate of men aged 75 years and above are the highest compared to other age brackets. And 75 is typically around the retirement age range.
So, the question is, why are many retirees depressed? While many factors could lead to depression amongst retirees, one of the most common reasons is finances. With no regular flow of income, you’ll have to live on pension funds and previous savings.
But how do you ensure that you don’t run out of funds before you run out of time? How can you remain financially free even after retirement?
Here’s where the retirement bucket strategy comes into play. It is a system to ensure that your money lasts after you’ve achieved financial independence.
What Is a Retirement Bucket Strategy?
The retirement bucket strategy is a technique in which retirees divide their assets into holding areas—or buckets—based on when they’ll need the money. With this system, you’ll not only have enough funds to cover your expenses after retiring, but you’ll also be able to invest the rest of your money.
This method also seeks ways to invest without suffering the pain of inflation and other market factors.
How The Retirement Bucket Strategy Works
The retirement bucket strategy entails splitting your assets into three parts or buckets. Each bucket has a time frame to use the resources allocated there.
- The First Bucket contains your safe or ready-to-use cash.
- The Second Bucket is a conserve. That is a moderate Portfolio
- The Third Bucket is used in an Aggressive Portfolio.
Let’s look at these in detail.
#1. The First Bucket
This bucket contains your liquid money— that is, your ready-to-use cash. In simpler terms, this is the bucket you’ll take your everyday and current expenses from during your retirement. It’s usually for the short term, about two to five years.
You can keep the money for this bucket in a current or savings account. It’s not for investing.
To determine how much money you’ll need for this bucket, add up your expected annual living expenses during retirement. After that, subtract all guaranteed sources of income, like pension, Social Security, or annuity. The outcome is the amount of money you’ll need annually to maintain your current lifestyle in retirement.
Multiply that amount by the number of years you want to fund. That’s the amount of cash you should have in your first bucket.
#2. The Second Bucket
As earlier stated, this bucket serves as a reserve. Expenses on the ‘rainy day’ come from this bucket. You can focus on generating income for moderate expenses during retirement for this bucket. This includes a longed-for vacation or your children’s college fund.
The second bucket is also the bucket that will replenish the first bucket after the two to five years time frame.
You can invest this money, but not in risky assets that regularly fluctuate. Instead, it should consist of fixed-income investments such as certificates of deposit and bonds.
The assets in this bucket can stay for about 5—8years and above.
#3. The Third Bucket
This bucket contains assets for the long run or far future. It replaces or refills the second bucket each year as it is being used.
This bucket creates room for more profit. This is because the investments here are riskier and take longer to mature. They include trading in stocks and other highly volatile assets. As such, the third bucket is termed an aggressive portfolio.
The investments here are funds you will likely not need until about ten years after retirement.
Ideally, the best way to apply the bucket strategy begins with the First Bucket. Once you can fund about 3—5years of expenses, you move onto the second bucket. That is, start your short-term investments and so on.
The Pros: Why You Should Consider The Bucket Strategy
Some of the advantages of the bucket strategy include:
#1. It Gives A Sense of Financial Safety
Fear of the future and the unknown are reasons people become anxious. With this strategy, you won’t be uncertain about your financial future.
#2. Room For Income Generation
The retirement period is often linked with financial inactivity. This does not have to be the case.
The bucket strategy makes it possible to earn in addition to fixed income, e.g., pension. That means living comfortably.
#3. There is no need to worry during market fluctuations
The stock market can be unpredictable. Stocks can become devalued. The bucket strategy ensures spending cash even when these fluctuations occur.
The Cons: Red flags To Consider Before Attempting This Strategy
Some disadvantages come with the bucket strategy. They include:
#1. Uncertain Rates of Retirement Expenses Estimates
The bucket strategy requires calculating anticipated future expenses. However, this estimate may not capture certain unforeseen circumstances. As such, a slight change can crumble the whole process.
#2. Market Fluctuations Can Cause Fluctuations in Returns
Projections in the bucket strategy give a sense of stable return rates from investment.
It gives the notion that the profits always come in the same quantity.
However, this is not the case. Therefore, it is hard to make plans on an income that is not constant. Again, the whole system can crash easily due to a slight change in market factors. For instance, COVID 19 affected the stock market adversely.
A crisis sets in when there is nothing to refill used buckets.
Bottom Line
Financial freedom before and after retirement requires intelligent decisions and adequate planning. Fortunately, at the Art of Financial Planning, helping people achieve and maintain financial independence and security is our forte.
Contact us and let us help you on your journey to financial freedom.
