Retirement Investing Using Buckets
Retirement Investing-The Main Challenge
The long time problem of retirement investing has been the need to have a significant amount of money in equities while avoiding a downturn in the equity markets from destroying your retirement nest egg. Once retired, you cannot earn it back again if you lose it in the stock market. Why do you need a significant amount in equities? Because unless you're rich, you need the return that stocks provide (about 10% annually over the long term) in order to have enough to survive retirement.
It's paradoxical, but it's the rich guy that can afford to be conservative. With $5 million, he can stick it in the bank at 2% and have $100,00 annual income. But if your nest egg is $1 million, you cannot survive on 2% interest. You are forced to take more risk to get a higher return. So the paradox is that rich people can invest for retirement more conservatively while those with fewer financial resources MUST invest more aggressively if they have any hope of having their retirement savings last. To see the proof of this, please look up the Trinity Study.
By the way--your financial advisor is subject to regulations that will not permit him to do what is best for you. If your resources are modest, he must be more conservative with your funds. In fact, the only way you can make it (i.e. have your retirement funds last for 30 years of retirement), is a retirement investing program that takes sufficient risk to get the return you need.
Retirement Investing Solution
The solution to the problem of equities taking a dive in the middle of your retirement is the bucket strategy. Here's a simplified example of retirement investing using buckets. You divide your funds into 3 buckets: bucket one contains retirement funds to be used over the next 3 years, bucket 2 contains retirement savings to be used 3 to 10 years out and bucket 3 has retirement funds to be used beyond 10 years. Stocks in your retirement investing program go into bucket 3 so that you won't be relying on them for 10 years. The historical good news is that stocks have gone up in value in 97% of the 10 year periods since 1926. Of course, the future may not be the same as the past. But since we can see the past and not the future, history suggests that you have put the odds well in your favor if you always invest in stocks (or stock mutual funds) when you can let the funds sit and work for a least 10 years.
Our retirement goal for bucket 3 is to have the money grow at 10% annually (the long term average for stocks) so that each $1 will become $2.59. Should the stock market do extremely well and reach your goal before year 10, you start removing the excess and placing it in fixed income securities. Should the stock market take a dive, you wait out the 10 years as historical probabilities are that the value of bucket 3 recovers by the time you need to rely on it.
[...] to the insurance industry. I will maintain a large portion of equities until then using a bucket strategy (covered in a future post) and then, about age 70, switch my retirement portfolio to immediate [...]
You are right, Retirement Investing The Main Challenge. But you can make loan from bank too.
Very helpfull blog after retirement for safety of life in future
This strategy makes a lot of sense. I have about 10 years before I retire and it sounds like there would still be time for me to approach investing this way. Having lost a near fortune in the stock market I'm still a little leery about stocks.
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