The biggest challenge that investors face when managing their money for retirement is aligning their portfolios for long-term success. Properly aligning retirement investments for long-term success boils down to having a solid financial plan that considers all your resources. Accurately reflecting on all your goals and objectives is critical. Dialing in spending patterns, including routine and extra expenses, is necessary for proper financial management. 

In retirement, you have two objectives for your money, which are polar opposites. On one hand, you need a source of reliable cash flow. On the other hand, you should have a long-term basis for your portfolio to grow and offset the impacts of inflation. Many financial advisors recommend you split your money into two separate portfolios. This separation will allow retirement investments to align with the two objectives mentioned. 

The Bucket Strategy

The Cash-Flow Bucket

We target multiple years’ worth of cash requirements for the cash flow piece. This portfolio allows for safe, reliable cash flow that is conservatively invested and therefore does not fluctuate with the stock market. Normally, this is where living expenses are addressed. 

To determine the proper amount in this cash flow bucket, you need to consider various sources of income. Even though almost everyone has access to Social Security benefits, you need a strategy to maximize this resource. 

Questions you might ask are: 

• Since benefits increase until 70 years of age, will you wait until you are 70 to claim Social Security benefits? 
• If you are married, how are you planning to maximize the spousal benefit? 

Work with your financial advisor to determine the optimal time to file for your benefit. Retirement and claiming benefits is not a “one size fits all” issue. The proper claiming strategy includes multiple considerations such as the age difference between spouses, the benefits each has earned, the availability of other assets to provide cash flow, and considering income taxes, to name a few.

Long-Term Growth Bucket

The other portfolio is managed for long-term growth to combat the effects of inflation and avoid them from getting in the way of the return on your retirement investments. 

As the rate of return target is achieved, you should move another year’s worth of desired cash flow from the growth bucket into the cash flow bucket. 

In the case that the portfolio takes a year to earn a year’s worth of return, the cash flow bucket maintains its multiple-year target. If we go through a period of declining markets, we patiently wait until the growth is achieved.

Relationship Between the Two Portfolios on the Market

Due to the overall asset allocation between the two portfolios, when the stock market goes through its periodic declines, you end up with a greater overall percentage in equities. This is the type of distribution you want. The cheaper the stock market is, the more of it you want to own. Using up some of the cash flow buckets decreases the overall percentage of fixed income. Then as the market rebounds, you can build back the cash flow portfolio through your long-term growth bucket. The bucket approach is a highly disciplined approach to portfolio management, where the two buckets work hand in hand and complement each other.

Retirement Investments at a Glance

By separating these objectives into two separate portfolios, we can add the element of time to achieve growth. This prevents liquidating growth investments when the market is down to produce cash flow. It also adds peace of mind for our retiree clients, knowing that we have multiple years’ worth of their cash needs met without disrupting the longer-term assets.

Closing Thoughts

Without a disciplined approach, retirees are tempted to do things that are detrimental to successful portfolio management, like market timing or not having enough growth potential in their portfolios. A cash-flow portfolio where you set aside cash needs in a stable environment buys you a holding period to unlock 5 years of retirement cash flow.