We’ll delve into the definition of bucket strategy and work through an example to see if it may be a good fit for you.The image of buckets certainly does not evoke a hot, new investment concept. Something as pedestrian as a bucket hardly has the same vibe as a meme stock or non-fungible token . Simply put, a bucket strategy is a method of dividing up your investment portfolio into different accounts. Each of the different accounts , has a different purpose or goal associated with it.
But now that he’s about to retire, he’s wondering how he is going to take his 401 balance and make it into a series of monthly payments that will continue the rest of his life. This latest market decline has him spooked as it’s the second bear market in the last three years. While he was fine ignoring the markets as he was putting money into the 401, he now looks to withdraw from his retirement plan and the recent volatility leaves him uneasy to say the least.
Once this IRA is funded, he purchases Treasury bills or a money market fund with one third of the account to fund regular withdrawals of $3,500 a month over the next year. With the remainder of his short-term bucket IRA, he purchases a Treasury bond that matures one year from now, and another that matures two years from now. He could also use ETFs and mutual funds to achieve the same strategy.
Astute readers will recognize that the short-term bucket will gradually decrease as you take distributions to fund your living expenses. To address that, every year Rick will transfer another $42,000 from the investment bucket IRA into the short-term bucket IRA. Once those funds are moved into the short-term bucket, he will use those funds to purchase another Treasury bond that matures in two years.