How To Manage Your Retirement Portfolio (The Bucket Strategy)

Are you really prepared for the future?

Having enough to live comfortably right now is great. But what happens when the future finally lands and you can’t afford to maintain your standard of living?

Learning to manage your retirement portfolio can help you avoid such risks. 

Imagine relaxing, with your feet up, and going about your day without any money worries. Most new retirees are in a huge dilemma about what to do with their retirement portfolio. It’s quite intimidating because most of the choices they make will affect the future of their family. 

It’s overwhelming to receive your lump sum pension payment and not know what to do, especially with the ongoing risk of changing economic events. 

So, if you want a proven retirement portfolio strategy to make your future secure, here’s everything you need to know.

how to manage your retirement portfolio

Imagine this is your life…

Picture a regular person who is 65 years old and has just retired from a long career. 

This person has also commuted their pension (this means they receive a lump sum as opposed to a stream of smaller payments) and receives about $50,000 every year from their million-dollar retirement portfolio. 

This individual might have some investment experience. But there is a huge worry for them if the stock market fluctuating significantly. 

Adelaide healthcare specialists Flex Osteopathy see senior citizens every week and say financial stress is often one of the primary concerns. They note “retirees often realise there is no option of going back to work and if financial situations change this can be confronting. In this situation, you don’t want to turn your current financial success into a future loss.”

That’s where the bucketing strategy comes in handy. 

Here’s how you use the bucket approach to retirement planning.

How to use Bucket One

In the scenario above, the first bucket is where the person receives his yearly income. 

If they receive $50,000 per year from the investment portfolio, a portion of this money will be deposited in the first bucket. 

The goal here is to provide liquidity and preserve the overall value of their finances. 

Takeaway: This bucket is the liquid component. It should meet your short-term living expenses. This bucket is not designed to provide investment returns. It just helps you day to day while your other buckets generate income.

How to use Bucket Two

With bucket #1 protecting your short-term finances, the next step is what happens after. 

In the scenario above, with the second bucket, the person will safeguard their income for the 2nd to the 9th year of their retirement. 

By getting $50,000 per year and leaving $10,000 in bucket #1, $40,000 will be deposited into the second bucket.

The goal here is to ensure the person has safety and future liquidity whenever they need it. 

Here, the investments chosen should have few fluctuations but should also be an income stream to ensure that the entire portfolio will grow. 

Takeaway: This second bucket provides income and stability for your retirement portfolio. Income from bucket #2 is used to refill bucket #1 as the amount in it declines.

How to use Bucket Three

The remainder of the retirement portfolio will be deposited into the 3rd bucket. 

Money here will be used for long-term investments. The investment portion of the entire portfolio is the term for this. 

It’s the money required in 10+ years to ensure that the person has income throughout their retirement.

There is a long time frame in this case so you can make long-term investments decisions with this bucket. 

For example, you may invest in the stock market since it’s a great place to invest for long-term growth where the intermediate fluctuations won’t affect you so much (as you have bucket #1 and bucket #2 to rely on instead).

Takeaway: The third bucket is designed to grow and protect your retirement savings. Investment ROI from this bucket fluctuate over time. The assets in this bucket are then held over the long-term and ride out any return volatility.

elderly couple on beach

When should you not transfer between buckets?

If in the case of the individual above, if there was a great first year in the stock market, then $50,000 would be transferred from the 3rd bucket into the 2nd bucket. 

If $50,000 was already transferred from the 2nd bucket to the first one, the 2nd bucket will now be refilled from the 3rd bucket. 

However, if there was a bad hit in the stock market, no transfer would be done from the 3rd to the 2nd bucket. 

You typically wouldn’t withdraw money when taking a loss. 

If you’re struggling to see how this strategy works, business building expert David Hall suggests engaging your visual side. He explains, “use visual concepts. Most people are visual. They are more persuaded by visual imagery than simple conversation.” So by picturing each bucket and the importance of each one, you’ll be able to better understand why you need to practice discipline with your bucket spending and withdrawals.

Are you looking to protect your future?

The bucket strategy is great for retirees because it provides discipline and it’s easy to implement. 

As financial data experts Direct ID explains, “for many people, life is becoming increasingly busier every day and they may even go to places where it becomes difficult to find a brick-and-mortar location to do financial transactions.” In an evolving financial climate you can avoid the headache of having to manage multiple approaches and create a diversified portfolio by using the figures from each bucket. That means you will always receive a regular pay-check during your retirement years. 

Uncertain about investing in the stock market? This approach to your retirement portfolio means there is no need to withdraw while you investment grows. 

A great advantage with this retirement portfolio strategy is the fact that you can sell your stocks when you need to rather than being forced to do so. 

Health and wellness experts agree that retirement is the time in your life where it’s important to relax and reflect on the life you have lived so far. You shouldn’t be enduring more stress heading into retirement. The most important part of you is your health, so take the time now to strategise the other aspects of your life like finances to enjoy retirement fully.

retirement planning business

Final thoughts

Ensuring a good return of your retirement portfolio can be tricky without the right investment advice. 

However, with the bucket strategy, it’s easy to get your money when you need it. 

Even better, you can always avoid withdrawing when the stock market is fluctuating. 

Of course, you need the services of a great financial adviser to pull this off.

If you set a certain amount to receive per year, you can always have that to fall back to even when everything goes bad. 

Therefore, you can get the $50,000 without any worries. 

When withdrawing from the second bucket to the first bucket or the third bucket to the second bucket, you will not need to worry about any fluctuations in the stock market because your money is in safe hands. 

With that, your finances can cause stress for your future. So it’s important to input a retirement plan/guide to protect your finances today. 

Are you looking for support as you transition into retirement? Chat to the experts from Wealth Path today!