Buckets are basically a metaphor and a way of segmenting retirement resources or assets according to the needs, risk tolerance and overall financial plan of the retiree. The segmentation is intended to provide a plan for distributing or "drawing down" the assets during retirement.
As a highly simplified example, a person with $600,000 in retirement assets may choose to separate that money into 3 different buckets:
1) $200,000 for near-term (next 4 years) liquidity and spending needs. This amount would remain in highly liquid, conservative investments so that it does not fluctuate and is readily available for draw-down / spending.
2) The next $200,000 might be placed in fixed income investments and be targeted for draw down during the subsequent 4 year period. The investment profile can presumably be a bit more aggressive since the time horizon is longer.
3) The remaining $200,000 is in the longest term bucket, and as a result, might be invested most aggressively in equities, etc.
This is a simplified example. Note that there are many critics of the bucket approach. Also note that this approach really does nothing to mitigate longevity risk.
tom replied on Permalink
Buckets for Retirement Planning
I also saw a recent article. If we're looking at the same article, it was the following in the Wall Street Journal: http://online.wsj.com/article/BT-CO-20100122-706836.html?mod=WSJ_latesth...
Buckets are basically a metaphor and a way of segmenting retirement resources or assets according to the needs, risk tolerance and overall financial plan of the retiree. The segmentation is intended to provide a plan for distributing or "drawing down" the assets during retirement.
As a highly simplified example, a person with $600,000 in retirement assets may choose to separate that money into 3 different buckets:
1) $200,000 for near-term (next 4 years) liquidity and spending needs. This amount would remain in highly liquid, conservative investments so that it does not fluctuate and is readily available for draw-down / spending.
2) The next $200,000 might be placed in fixed income investments and be targeted for draw down during the subsequent 4 year period. The investment profile can presumably be a bit more aggressive since the time horizon is longer.
3) The remaining $200,000 is in the longest term bucket, and as a result, might be invested most aggressively in equities, etc.
This is a simplified example. Note that there are many critics of the bucket approach. Also note that this approach really does nothing to mitigate longevity risk.