By Bill DuBose, CFP®

As an advisor, I often get this question from my clients right before they plan to retire: Who is going to pay me in retirement? They are realizing that their paycheck is about to end and are worried about the next phase of life.

As you can expect, anxiety levels significantly increase with wild market volatility, like we have experienced lately. In addition, many of my clients are independent women and therefore only have a single source of income and investments upon which to rely. These factors and others have brought me to adopt a solution that I think serves many of my clients well.

So, what do I mean by “buckets,” you might ask? Take a look at the chart below. There are many different bucket ideas out there and I have borrowed from some, modified others and created an approach that has been helpful to my clients. I also preach that we should consolidate and simplify, and this approach complements that philosophy.

I firmly believe that equity investments (stocks) are important for long-term growth and to keep up with inflation and purchasing power. However, I also know that markets, both here and abroad, can be very volatile. While volatility is a normal element within long-term market cycles, the worry and uncertainty that it creates in the short-term can often be paralyzing. Not to mention that market declines in the early years of retirement can be devastating to your long-term plan.

In an effort to counteract this, my clients and I start with planning often incorporating some assumptions with regard to when they plan to retire, how long they hope to live, and how much money they will need to live out their retirement. From there, we consider any ongoing, guaranteed income streams available to them including Social Security Income, perhaps a government or company pension, and maybe an annuity. I use the term “guaranteed” solely to the extent that we realize these guarantees are only as strong as the underlying government, corporation or insurance company providing the income.

One or more of these options can provide the foundation to cover some or even all of their annual income needs. It is important to note that these plans are NOT invested in the equity markets. They can provide a constant, predictable income stream—no matter what is going on with the stock market! Of course, there are choices to make such as when to start Social Security or a pension payout and whether to employ an annuity in your plan. For example, many of my clients decide to move some of their assets into an annuity (usually a single premium immediate annuity or SPIA) to supplement their other income stream(s). Certainly, each plan must be tailored to the individual client and with so many options, we cannot go into details here. But, we are happy to address your situation in our one-to-one planning with you.

Now that we have built our income floor or foundation, we move to the buckets. Again, each client is different, but I recommend that the first bucket of cash hold at least one year – maybe even two years – to cover living expenses that are not provided by the foundation income stream(s). My clients know that this bucket will fund what they need (or desire) to live on for the next year or two without having to worry about what’s going on in the stock market.

The next, or second, bucket holds short-term, high-quality bonds. These are not high-risk bonds with low credit ratings. These are investment grade holdings that may not provide a high interest rate, but they will also not be as volatile as stocks and will provide diversification and a buffer to bucket number three: equities.

In the third bucket, we hold a diversified portfolio of domestic and international stocks. This is the only place in the plan where we have exposure to equities. We implement a long-term investment strategy and understand that volatility in the markets can be helpful for our long-term goal of growth. We also look to this bucket to help refill bucket number one over time.

This approach is simply a starting point. Some advisors like more buckets. Others prefer to implement different investment strategies to prepare for market downturns. And, as you can imagine, there are many other issues that need to be considered such as tax implications and which assets to use in retirement first. My colleague, David O’Neill, has a blog addressing some of the issues, including in what type of account certain assets should be held. Check it out!

Over the years, I have discovered that my clients prefer simplicity, predictability and security. My bucket approach fosters this preference while also supporting the natural transition toward a more conservative stewardship of finances as we age. This philosophy helps both my clients and me sleep at night!

To discuss creating a bucket strategy to support your retirement income, please reach out to my team and me.