The Bucket Approach for Retirement Income

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Making a bucket for shorter-term income needs can secure peace of mind (and prevent poorly timed sales) during volatile times, says noted planner Harold Evensky.

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The Bucket Approach for Retirement Income

Morningstar

Retirement Focus with Christine Benz

Christine Benz:	Hi I’m Christine Benz for Morningstar.com here today with Harold 
Evensky. Harold is President of Evensky & Katz Wealth Management. 
Harold thanks so much for being here.

Harold Evensky:	Thank you.

Christine:	Harold you were really a pioneer in terms of what is now been called this 
bucketing concept for managing retirement income can you talk about the 
bucketing approach and why you think make sense for retirees for 
managing their portfolios?

Harold:	Yeah the fact of the matter it really makes sense for anyone. I think we 
believe that the risk of investing in the market is the short term volatility 
of the market so we develop back in the early 80s I think we call our 5 
year mantra, 5 years, 5 years, 5 years simply the means. We don’t believe 
anyone should invest money that they’re going to need the next 5 years 
too much risks.

Christine:	Stocks or bonds?

Harold:	Stocks or bonds too much risk that they’ll need it a long time.

Christine:	Right.

Harold:	So we carve out for any lump sum. Someone says gee I want to buy a 
second home three years from now. Well carve that out of the investment 
portfolio and put it in short term bonds or cash. When it comes to 
retirement income someone says I got a million dollars. I need 50,000 year 
out and try to figure it out. Carving 5 years of cash flow is too much 
opportunity cost all that money sitting in cash so we experimented and 
came up with 2 years.

So it’s okay put 2 years in cash, take the other and then 900,000 in 
invested in a total return portfolio what that does is you can take that cash 
and sell it up to pay a check ones a month like a payroll check. The market 
can be volatile but you know when your grocery money is coming from so 
you’re not going to get panic on what’s going down as you manage your 
investment portfolio gets out of whack and you do rebalance you look 
over and say gee its coming down let me move some money over so you 
can do much more cost in tax efficient managing portfolio.

You’re not going to have to sell it a long time you can sleep through 
volatile times as a client said make sure I understand I don’t have to be 
happy but I don’t have to worry that’s no one is going to be happy losing 
money but we did that prior to the 87 crash plants come through well tech 
bust and recently so it’s a very effective strategy of minimizing the risk of 
taking the money out the wrong time.

Christine:	Right.

Harold:	But its really, really simple idea.

Christine:	Right.

Harold:	So now I think I’ve heard some advisers putting forth as many as 8 
separate buckets, how many buckets say you’re do it yourself investor 
managing your own retirement portfolio what would be a sensible number 
of buckets?

Christine:	Basically 2.

Harold:	2 keep the cash out.

Christine:	Short term.

Harold:	Design a balance that we don’t have time to kind of go in a multiple 
buckets but the risk of a multiple bucket is you have one for college and 
you’ve got a goal before that that you want to pick a trip and you don’t do 
it because you don’t have enough money and then you find over funded 
for the other one you can’t go back and take the trip later so we believe 
that the overall planning ought to be holistic and the cash the short term 
want to be carved down so plus most people its easy to understand the two 
buckets in manages too.

Christine:	You just have to be sure to periodically fill up that near term market?

Harold:	Right. Consistently be reviewing but if you’ve got an investment portfolio 
there’s always some reason you need to be making adjustments 
rebalancing it. You fire the manager you got some excess so say once a 
quarter and just kind of look over and say gee I’m doing this anyway let 
me take the opportunity to fill my bucket back at my cash bucket.

Christine:	So within that longer term total return bucket you would presumably have 
a whole range of investment options ranging from quite conservative to 
your long term stock holdings?

Harold:	Right the allocations the amount between bonds and stocks and the 
question this is going to be a function of what do you need in terms of 
where we turn to long term to achieve your goals that’s going to turn in 
that allocation so maybe very aggressive. We got lots of money that 
maybe very conservative but that’s unique each individuals.

Christine:	Yeah well thanks Harold it seems like a great approach that you are an 
early pioneer of.

Harold:	Of course.

Christine:	And it’s very intuitive and makes a lot of sense so thanks for sharing it 
with us.

Harold:	Thank you.

Christine:	Thanks for joining us I’m Christine Benz for Morningstar.com.