Jeran Van Alfen, CFP®
Bucket Your Investments for Peace of Mind
In many of the conversations that I am having right now, I am reminding people to stick with the playbook. There are investment fundamentals that I always come back to as they have been proven to be successful strategies through the various market cycles that we have been through over the years.
One of the most important fundamentals that I discuss on a regular basis is separating your asset allocation based on when you need to use the money. Some people call this a bucket strategy and there are several ways that you can actually implement it.
Asset allocation rules
Whether you are accumulating money or withdrawing money, it is important to separate your investments based on your time horizon. This separation can be a mental separation or an actual physical separation using different accounts. Here are some general guidelines:
Money to be used in 1-2 years: Keep in cash
Money to be used in 3-5 years: Allocate to fixed-income investments (i.e., bonds)
Money to be used in 5+ years: Allocate to risk assets (i.e., stocks, real estate, etc.)
When you physically or mentally separate your assets into these locations it can help you approach market volatility. If the money that I intend to use in 5+ years is experiencing a strong downturn, I can rest somewhat easier knowing the money that I need right now is protected.
The bucket strategy can be a helpful way to approach retirement spending. It provides the same emotional support because specific assets are kept safe for short-term income while other assets are exposed to risk for higher growth over time. Your strategy should be unique to your financial plan and could utilize a combination of asset types. Here is an example of a hypothetical bucket strategy:
Source: Capital Group
Setting up your strategy
As you approach retirement, it is important to consider how your allocation should be different from when you were saving and accumulating your nest egg. A common mistake is to become too conservative. Remember retirement is not the target date. We should be planning and investing for your money to growth throughout your lifetime.
Here is a good article from Fidelity that describes the retirement bucket strategy
Planning centered on you
Let’s make sure your investment strategy matches your unique needs and goals! We are happy to discuss how to approach your allocation and adjust your investment buckets as needed.
Centered Financial, LLC is a registered investment adviser offering advisory services in the State of California, Utah, Texas and in other jurisdictions where exempted. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. There is no assurance that the techniques, strategies, or investments discussed are suitable for all investors or will yield positive outcomes. To determine which strategies or investment(s) may be appropriate for you, consult your financial adviser prior to investing. Any discussion of strategies related to tax or legal planning is general and is not intended as tax or legal advice. Please consult appropriate tax and legal professionals for recommendations pertaining to your specific situation.