John and Mary (our hypothetical clients) are nearing retirement, and they have a lot of items on their bucket list. Longer life expectancies mean John and Mary may need to prepare for two or even three decades of retirement. How should they position their portfolio to maintain their lifestyle throughout their retirement?
A common approach is to segment your expenses into three buckets:
- Basic Living Expenses— Food, Rent, Utilities, etc.
- Discretionary Spending — Vacations, Dining Out, etc.
- Legacy Assets — for heirs and charities
Next, pair appropriate investments and resources to each bucket. For instance, Social Security, pensions, or high-quality bonds might be assigned to the “Basic Living Expenses” bucket. These resources are relatively safe and can offer a stable income that be used to pay your basic living expenses in retirement.
For the discretionary spending bucket, you might consider investments that pay a steady income stream and that also offer the potential for growth. Investments in this bucket could include things like dividend paying, large cap stocks or even high yield bonds.
Finally, list the Legacy assets that you expect to pass on to your heirs and charities. This bucket could be matched with more aggressive investments such as small cap stocks and emerging market stocks.
A bucket plan can help you be better prepared for a comfortable retirement. It can also help you manage the risk of falling short of your income needs throughout retirement.
If you need help developing a strategy to fill your various “buckets”, please do not hesitate to reach out to us.