The baby boomers have re-defined everything they’ve touched, from music to marriage to parenting and, more lately, to what “old” means—60 is the new 50! Longer, healthier living, however, can put greater stress on the sustainability of retirement assets.
There is no easy answer to this challenge, but let’s begin by discussing one idea—a bucket approach to building your retirement income plan. I hear buckets being mentioned more and more in the financial planning world and I think this is largely due to how it can help investors better understand where they are in relationship to their goals.
The Bucket Strategy can take many forms. The form I like the best is
The Timeframe Bucket Strategy: This approach creates buckets based on different timeframes and assigns investments to each. For example:
• 1-5 Years: This bucket funds your near-term expenses. It may be filled with cash and cash alternatives, such as money market accounts. Money market funds are considered low-risk securities but they are not backed by any government institution so it’s possible to lose money. Money held in money market funds is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Money market funds seek to preserve the value of your investment at $1.00 a share. However, it is possible to lose money by investing in a money market fund. Money market mutual funds are sold by prospectus. Please consider the charges, risks, expenses, and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money.
• 6-10 Years: This bucket is designed to help replenishment the funds in the 1-5 Years bucket. Investments might include a diversified, intermediate, top-rated bond portfolio. Diversification is an approach to help manage investment risk. It does not eliminate the risk of loss if security prices decline.
• 11-20 Years: This bucket may be filled with investments such as large-cap stocks that offer the potential for growth with a small amount in longer term assets such as small cap and international investments.²
• 21+ Years: This bucket might include longer-term investments such as diversified domestic equities and international stocks.²
Each bucket is set up to be replenished by the next longer-term bucket. This approach can offer flexibility to provide replenishment at more opportune times. For example, if stock prices move higher, you might consider replenishing the 6-10 Years bucket even though it’s not quite time.
A bucket approach to pursue your income needs is not the only way to build an income strategy. But it’s one strategy to consider as you prepare for retirement. This strategy can often help a client sleep at night because the fund they are using in their immediate future are not put through the same amount of volatility as funds they may want to leave behind to heirs!
1. The market value of a bond will fluctuate with changes in interest rates. As rates rise, the value of existing bonds typically falls. If an investor sells a bond before maturity, it may be worth more or less that the initial purchase price. By holding a bond to maturity an investor will receive the interest payments due plus their original principal, barring default by the issuer. Investments seeking to achieve higher yields also involve a higher degree of risk.
2. Keep in mind that the return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost. Dividends on common stock are not fixed and can be decreased or eliminated on short notice.
3. Asset allocation is an approach to help manage investment risk. Asset allocation does not guarantee against investment loss.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2015 FMG Suite. Securities and advisory services offered through National Planning Corporation.(NPC) Member FINRA, SIPC, and a Registered Investment Advisor. Trilogy Financial Services and NPC are separate and unrelated Entities.
About Your Columnist
Windus Fernandez Brinkkord is a featured columnist for Women Taking Charge, the official blog of Connected Women of Influence, where she covers the intersection of women in business and managing their investments and taking charge of their financial future. Currently, Windus is Senior Vice President of Investments with Trilogy Financial Services, a financial services company that focuses on helping business owners and individuals build and manage wealth.
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