How to Create a Paycheck in Retirement: The Bucket Approach

How to Create a Paycheck in Retirement: The Bucket Approach

| January 04, 2021

There was a time in our parent’s and grandparent’s day when one could hold a group of blue-chip stocks and live off the dividends. My wife’s grandmother lived her entire retirement off a pension and a little inherited stock. It was a good retirement for her, and financially it was a simple one.


Times have changed. Pensions are rare, dividends are smaller, well-known blue-chip companies are underperforming, and two “once in a lifetime” recessions have rocked our portfolios in the last twenty years. It is a more dangerous market than it was in our parent’s time, and when the advice of those who came before us fails it leaves one scratching their head about retirement income.


              Retirees are confused. They are confused about how to create income streams that are reliable and safe, they are confused about if they have enough money to live. The result is lost sleep, high stress, and dwindling savings. While there are other income strategy options out there, one has been picking up in popularity over the last several years: the bucket strategy. The bucket strategy is a time-tested way to create a lifelong, stable paycheck in retirement.


              The idea is simple: build your financial life the same way a large company would build their balance sheet. Large companies have cash on hand to pay employees, short term investment to weather storms, and capital that is out there making them money. A well-run retirement has these same three buckets and uses them to create prosperity and confidence. Let’s look at how these buckets operate for a retiree:


  1. The Paycheck Bucket: Retirees come to me all the time with the misconception that growth is the most important thing in a retirement portfolio. Growth is certainly important, and it feels good to watch our money grow. But the most important thing in a portfolio for retirees is income. We would not work for a company that could not afford to pay us on time, and we should expect no less of our portfolio. The paycheck bucket uses the same strategy your employer did: cash on hand. It may feel strange to have a portion of your portfolio earning meager cash returns, but when the market fails at the same time as your furnace you begin to see that not everything in a portfolio is about growth. Stable income is the foundation of your retirement, and cash (not dividends) are the stable option.


  1. The “On Deck” Bucket: There is an old saying in this industry: “The market can remain irrational longer than you can remain solvent”. Trust me, you never want to put your retirement income in a race against recession. That is why bucket two remains in income producing, safer assets. These assets, like bonds and alternative investments, provide a stronger income stream and protection against a down market. When the worst occurs, the On Deck Bucket can be tapped into if your Paycheck Bucket runs out. Conservative investments create income flows and protect your Paycheck Bucket from longer term market volatility.


  1. The Growth Bucket: Finally, everyone’s favorite investment type: stock. Stock does a lot of great things, including protect against inflation and produce income. Most importantly stock grows over time. Stocks is incredibly important to anyone’s portfolio, but it is a balancing act. If you are forced to harvest stocks at a loss than all previous gains were meaningless. Luckily, we have two other buckets that protect our income, so the Growth Bucket can focus on growing. Having stock in a well-insulated third bucket allows us to only harvest gains and keeps your portfolio moving in the right direction, all without risking your paycheck.


Clients that utilize the bucket strategy tend to feel more secure in hard times, and the knowledge that your paycheck will arrive on time, every time eases many of the fears associated with retiring. This is why FFG uses this strategy so often.


There are other strategies out there, and the most important thing is that you have one. Not just any strategy, but one you understand and one that accommodates your needs. If you have no strategy, or if you feel your strategy is not working for you, maybe it’s time to tune up your retirement plan. Remember, the best things never just happen, they are the result of a plan and a strategy. What’s yours?