As many investors have become totally risk-averse following the market crash, UBS Wealth Management has just issued a retirement planning report that proposes segmenting the process into three buckets.

The first bucket would be comprised of totally safe and liquid holdings that a person could turn to in case of an emergency. For most investors, this would equal less than three years’ salary.

The core bucket would represent the money a person would need to cover essential living expenses, and would therefore comprise the bulk of a person’s assets, including all of their investment holdings, physical property, human capital, business interests and pension plan assets.

The leverage bucket would employ risk overlay and be used for a retiree’s wishes, such as travel, a second home, charitable giving or leaving a legacy, while at the same time help to narrow the retirement gap by encouraging them to return to riskier investing. The investments within the leverage bucket may include complex and risky instruments with limited liquidity, UBS suggested. Therefore, it reminds investors and advisers, “There is no free lunch.”

However, UBS added, “Using this investment strategy, investors who lower their spending objectives in retirement and transfer the difference to riskier assets might find themselves taking only a slight reduction in their immediate liquidity while availing themselves of greater upside potential.

“While this process won’t painlessly solve the retirement ‘trilemma’ of increasing savings, adjusting risk and resetting goals, it can employer investors who otherwise might avoid risk altogether,” UBS says. “While traditional measures, such as saving more and working longer, can help narrow this gap, they only go so far.”

UBS notes that nothing captures the ongoing sense of risk aversion better than the large surplus of funds currently sitting in money market accounts; the ratio of assets in money market accounts to the total capitalization of the S&P 500 reached 60% this year, whereas the historical average has been 20%.

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