One of the most common idioms when it comes to investing is “buy low and sell high.” It’s a simple notion that can be dreadfully hard to achieve in our retirement years. After all, your retirement investments are likely one of your main sources of income. If you’re “selling” to fund your retirement every few weeks, or each month, how can a person manage to consistently “sell high?” To attempt to do so might be maddening and to ignore it could be detrimental to your finances.
A really simple, yet effective strategy I employ is called the “Two Bucket Approach” to retirement income planning, and it works like this:
Step 1: You separate three-to-five year’s of retirement income needs into a low-risk portfolio. This is your “income bucket.”
Step 2: You put the remainder of your capital into a risk-appropriate, long-term portfolio. This is your “growth bucket.”
Step 3: You only take withdrawals from your income bucket.
Step 4: Review your growth bucket regularly. In years where it has made a profit, you top up your income bucket. In years where it has a dip, you don’t touch it.
By following this style of process, your routine “sells” are only made from stable holdings. Your infrequent “sells” are carefully managed. By keeping the next three, four or five years’ of income set aside, you can buy yourself time for the growth bucket to work through the natural ebbs and flows of the markets. By keeping the bulk of your investments in the growth bucket, you increase the potential longevity of your money.
It’s a win-win-win style of strategy that can really simplify your portfolio management in your retirement income years and build good investor habits. If you’re concerned about making your money last in retirement or reducing risk, give the Two Bucket Approach a try!
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