Smart Retirement Income Generation

Ronald Reinstein MBA. CDFA, CSSCS
Senior VP of Wealth Management 
The Financial Guys

Retirement means a lot of things to people. Freedom from the workplace. Your schedule is whatever you want it to be. New memories and adventures with those that care about. It also means living on a fixed income for an uncertain period of time. No one wants to run out of money prematurely. There needs to be a plan in place to make your retirement capital last as long as possible while living your best life in retirement.

In this phase of your financial life, you are looking for the latest and greatest stock tips. A successful retirement is generating the cash flow that is needed to pay your fixed expenses (the day-to-day necessities) and variable expenses (what do YOU want to do for fun) throughout your retirement. Especially in today’s environment, how to keep pace with inflation.

Bucket Strategy

I will always advocate for individuals to invest with a suitable amount of risk to generate the cash flow needed for a successful retirement. To adhere to having a suitable amount of risk, we need to have a diversity of different asset classes in our portfolios. The bucket strategy takes it a step further. Each “Bucket” that is established will have different objectives and levels of risk with the investment.

This strategy is designed to spread out investment risk needed to generate growth inside of the portfolios to ensure longevity while minimizing risk to generate income for current cash flow needs.

The first bucket is to provide money that is needed to meet cash flow needs for the next three to four years of living expenses and potential major purchases. These proceeds are liquid and not invested in the stock market, Here we are looking at a portfolio that contains a lineup of fixed investments. CDs, Money Markets, Bonds (Corporate to Government Issues).

Our second bucket is designed to generate capital that will be needed to be used in the next four to nine years. The objective here is to have growth and income from the investment mix. This may be achieved by a portfolio called “Balanced, “ a mix of 65% Stocks to 35% Bonds. As funds are used in the first bucket, look to implement a disciplined sell strategy with bucket two to start replenishing cash flow that leaves bucket one. In the event, this bucket is going through a period of capital appreciation.

Bucket three is money that is earmarked for use for ten or more years in retirement. With these parameters, we are looking for this money to be invested in asset classes that have greater growth potential. With greater growth potential comes higher levels of risk. This will increase the equity weighting of the portfolio. As discussed with having a disciplined strategy in bucket two, the same applies here. Even though it is viewed as long-term for use with cash flow, ring the register, take some profits off the table, and sprinkle them into buckets one and two.

There is not a one sized fits all approach when it comes to the science of retirement income planning. Make these decisions based on knowledge! Not what your parents did years ago or what your neighbor did two years ago when they retired. Your retirement income plan needs to be built for you and you alone!