How Should I Be Invested? Our Three Bucket Theory

Benjamin Haas |


The final step in our retirement process is determining an appropriate allocation and assumption on rate of return over time. We suggest a couple different approaches within this variable of your planning.

First, shoot low on your assumptions. Psychologically, most of our clients become more conservative as they age. Simply put, once those paychecks stop, your ability to save ends. Your resources are now not only finite, but have to last you the rest your life. Hence our clients tend to be a little more protective against potential market losses in this phase of their life. So use a conservative rate of return.

Second, regardless of your risk profile, consider using this exercise of retirement planning to determine what return you actually “need “to be making. If you’re ahead of schedule in reaching your lump sum need then perhaps you should consider scaling back the risk of your portfolio and increasing your likelihood of staying on target. If you’ve still got plenty of time before retirement, and feel risk adverse, you might use this exercise as an opportunity to see the value in long-term growth objectives. Investing is emotional, but the longer period of time you have the greater the opportunity to participate in market growth as well.

Finally, we help our clients consider using a bucketing strategy that purposes certain savings towards different retirement needs over different periods of time with different risk profiles. We typically choose the following:

  1. A cash bucket for needs within the next 1 to 2 years.
  2. A short term bucket to cover needs from 3 to 7 that’s primary objective is producing income to refill the cash bucket
  3. A long term bucket to cover needs 7 years+ that’s primary objective is capital appreciation to keep up with inflation over time.

This bucketing idea is built to help you withstand short-term moves in the market. If you hold an appropriate amount of cash for short-term needs, wants and wishes, then the stock market returns over a year or two will not affect your retirement paycheck. Similarly, if you hold enough in a short-term bucket, with investments that produce an adequate amount of income to replenish that cash, then you will not have to cut into your principal in a down market. Finally, if you commit to holding growth-oriented investments with the remainder of your assets, you can take gains when they occur but allow that bucket to recover during periods of difficultly.

In summary, there is no magic formula to investing. But allocate to your needs and risk. So, check your work. We use a tool called Riskalyze that quantifies (in dollars not percentages) what you hypothetically could lose and gain over short six-month periods. When you define your strategy, we suggest you use this tool to not only confirm your current feelings on risk, but also assess the risk associated with your current holdings at points of inflection in the market. You might be surprised what you will find out about yourself and the potential outcomes of your investing.

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Securities offered through LPL Financial, Member FINRA and SIPC. Investment advice offered through U.S. Financial Advisors, a registered investment advisor. U.S. Financial Advisors and Haas Financial Group are separate entities from LPL Financial.