Income for Life Retirement Series #1: Allocation of Money

Have you ever heard this saying: “Today is what it is because yesterday is what it was, so tomorrow will be what we make of today”? That statement sums up retirement in the truest sense. Whether it is 30 years away or five, retirement is coming. And how you prepare today, by the allocation of money, makes all the difference tomorrow.

The average life expectancy is 84 for men; while women can anticipate making it to the age of 86. Retirement for most starts around 63, however, could vary for any number of reasons. So whatever age you end up retiring, making your money last is essential. What can you do to ensure that happens? Every Friday for the next few weeks, I’ll give you 12 strategies to help ensure your nest egg outlives you—providing you an income for life.

With markets running at all-time highs and the economy booming, you may be worried that a bear market is just around the corner. If you still have 15-20 years until retirement, then that won’t affect you as much. However, if retirement is in the very near future, how can you protect what you have saved from market volatility. That’s where the bucket strategy comes into effect. The allocation of money into three different holding areas, or buckets – immediate, intermediate, and long-term, is essential. Let’s look at how to utilize each of these buckets.

1. The Immediate Bucket

This where you want to place the money you need access to now. You want to set enough cash aside in the account to cover your expenses for about two years. For example, let’s say you need around $50,000 a year to provide for your needs. That means you would take $100,000 out of your portfolio to cover your immediate needs. You’re going to take this money place it in a couple of different accounts, like a high-yield savings account, maybe a money market or something of that nature. You don’t need to make a ton of money on these accounts. Allocation of money into this bucket is merely for safe keeping. You want to quickly access the money as you need it to cover your living expenses during those first years.

2. The Intermediate Bucket

You’re looking a little further into the future with the allocation of money in this bucket. This is where you are planning to cover your expenses for years two to ten during retirement. You do want this bucket invested and to grow. However, you don’t want to invest this money in something with a high risk or volatility. You want to stay in a low-to-moderate risk category, offering a reasonable return on your money. That way from year two to ten we have the income we need to live on.

People typically invest this in something like bonds or CDs that they can continually roll over. Some are even investing this portion of their savings in preferred stock or real estate. However, this is indeed an area I’d involve an investment professional to help discern the best plan for you.

3. The Long-Term Bucket

Now, this is the bucket you want to see as much growth as possible. You won’t be tapping into these funds for at least a decade, so the allocation of money into this bucket has one goal —  to outpace inflation. You do want to invest this money fairly aggressively. Remember you are trying to make your nest egg last as long as you or longer! This is where stocks, real estate investment trust, annuities, etc., come into play. They naturally provide the most growth potential, and that is precisely what you want when aren’t touching this money.

Why This Strategy is Vital

Utilizing this strategy isn’t a guarantee in any way. However, it can cushion the blow of if a crash were to happen. Diversification of the assets in the portfolio helps to protect you from having to sell a long-term investment in the short term, taking a loss. That’s the last thing you want to happen as you’re entering retirement. We want to have money, not lose it.

This also provides a safety net of sorts. If the market drops, they have their money safely tucked away for the next 24 months. They are even covered for the next ten years, while their other investments have time to recover. Those equity positions that may take them on a roller coaster ride won’t cause them panic and jump out of the market, hurting them long term. Making your life’s saving last a lifetime is possible when adequately allocated.

Check out the video below for other ideas to make you money last. And if you want to discuss any of these “buckets”, we would love to talk to you.