One strategy utilized to allocate assets and generate retirement income is commonly called the bucket strategy.  In the bucket strategy, a retiree would consider setting up different buckets of money with a different investment strategy for each bucket.  The buckets are established utilizing a time horizon.

The first bucket should be designed to hold money for your first five years of retirement.  In this bucket, you’d take virtually no risk with the money and only be concerned that it is there for your regular withdrawal. Be aware that in today’s low interest rate environment, you may need more in this bucket to ensure that any interest-bearing can cover your needs.

In the second bucket, assets that would need to deliver retirement income in the sixth through tenth years would reside.  The thinking for bucket two is that with at least a five-year time horizon, you may choose investments with greater yield or an opportunity for appreciation.  Care should be taken to see that this bucket isn’t exposed to much risk unless you’ve got enough savings to fill the buckets for decades.

When you get to buckets beyond level two, and your assets within those buckets are intended to be your income source in 10, 20 or more years, other strategies become more significant.  While inflation has not taken a big chunk out of retirees’ paychecks in the past few years, it is likely to be different at some future period over your lifetime.

Beyond the publicized inflation rate, retirees tend to spend in areas that frequently exceed the inflation rates you read about.  These are health care and fun stuff.  Health care costs do not seem to be slowing from an inflationary perspective, and retirees have more ailments and greater frequency of illness than their younger golfing buddies.

And for the most part, the fun things in life seem to inflate at a faster rate than the basics.  The cost of travel, dining out and entertainment do not seem to be going down any time soon.

So, when you think about what that trip to Europe may cost in 15 years and the price for a head of lettuce in 25 years, you should make sure that you’re positioned in strategies that will be expected to keep pace with inflation for up to 40 years.  Simple math tells you that you must earn more on your money than the cost of living is rising.  With a three percent inflation rate, that anything less on your savings decreases your purchasing power.  This could be disastrous over a long period of time.

The greatest risks to investors lie in either being too aggressive and losing too much or being too conservative and outliving your money.  Try the bucket strategy out on your facts and figures and see how that compares to your current retirement income strategy.  Clearly this is not the only strategy, nor may it be the best for you.  But it may be a good smell test for the extremely conservative who wonder if they are doing the right thing.

By John P. Napolitano CFP®, CPA, PFS, MST Founder & Chairman Read More