If theres a common denominator among bucket strategies in retirement planning, its the use of a sizable cash bucket. We like to see retired clients with at least a years worth of needed funds in cash equivalents such as money market funds, says Eric Meermann, client service manager with Palisades Hudson Financial Group in Scarsdale, N.Y.
Often, this mode of retirement planning groups a clients other assets into fixed income and equity buckets. As the cash bucket is depleted, it might be replenished from the fixed income bucket, which in turn will be refilled from the equities bucket.
Other tactics could include using bond redemptions, interest income, stock dividends, or proceeds from capital losses to keep the cash bucket topped up. In any case, a bucket strategy for drawing down retirees investment assets needs a plan for refilling the cash bucket.
In the drawdown phase, we use a clients asset allocation to determine how to move money into cash, says Meerman. In 2008-2009, he says, when stocks fell sharply, our allocations became tilted towards fixed income. At that point, we wouldnt use money from equities to restore a retirees cash position. Instead, the firm rebalanced clients allocations, moving money from fixed income into equities, and retirees cash positions were refilled from fixed income rather than from equities.
And while clients asset allocations dont typically vary as they go through retirement, there is still "some flexibility with these plans," Meerman says. "If theres a significant decline in a clients wealth, perhaps in a bear market, we might suggest spending less, which would mean taking less from the portfolio.
Read the full story: Bucket Strategies for Retirement Cash Flow