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Constructing a portfolio this way may help you ride through a bear market in retirement.
Provided by Jeffrey C. Hamm
Stocks sometimes retreat. That reality can be overlooked in a long bull market. Bear markets do appear, and a deep downturn could force you to sell securities in retirement, so you can pay for necessary expenses.
Right now, you might have too much money in stocks. Years of steady gains may have unbalanced your portfolio and heightened your risk exposure. If you are 60 or older, that constitutes a warning sign, especially given this bull market’s age. What would a downturn do to your retirement fund and your retirement income?
If you are wondering how to respond to this risk, consider the bucket approach to retirement income planning.
The bucket approach may help you through different market cycles in retirement. This investing strategy, credited to a Florida financial planner named Harold Evensky, has simple and complex variations. It assigns fixed-income and equity investments to different “buckets” with the goal of providing sufficient cash flow to retirees during different stages of their “second acts.”1,2
The simplest version involves just two buckets. One holds the equivalent of 1-5 years of cash reserves (in deposit accounts and/or fixed-income investments), and the other holds everything else in the investment portfolio. When you need to fund your expenses, you turn to the cash and the fixed-income vehicles and leave equities untouched. Rebalancing your portfolio (that is, selling investments in an overweighted asset class) lets you increase the size of your cash bucket.1,2
Other versions of the bucket approach have longer time horizons. In one variation designed to be used for at least 25 years, a cash reserve bucket is created to fund the first two years of retirement, its size approximating 10% of the portfolio; the cash comes from FDIC-insured sources or Treasuries. A second bucket, intended to generate somewhat greater income, is planned for the rest of the first decade of retirement; this bucket is filled with longer-duration, fixed-income investments and comprises about 35% of the portfolio. The third bucket (the other 55%) is designed for the years afterward and contains a sizable equities position; the goal here is to realize some growth and compounding for a decade, then tap into that bucket for income.
In glimpsing the details of the bucket approach, you can also see the big picture. Suppose a bear market occurs just as you retire. Since your retirement income strategy pulls cash from deposit accounts and fixed-income investments first, your equity positions have time to rebound. You have a chance to avoid selling low (and selling off part of your retirement fund).
Is the bucket approach foolproof? No, but no investing strategy is. In the worst-case scenario, you drain 100% of the cash bucket(s) and end up with an all-equities portfolio. That is hardly what you want in retirement. Bucket allocations must be carefully calculated, and periodic bucket rebalancing is also needed.
The bucket approach may have both financial and psychological merits. Most retirees use the 4% rule (or something close) when withdrawing income: they take distributions from various accounts and asset classes, perhaps with little regard for tax efficiency. If Wall Street stumbles and their portfolios shrink, they may panic and make moves they will later regret – such as selling low, abandoning stocks or even running toward alternative investments in desperation.
When you use a bucket approach, you first turn to cash and/ or liquid securities for retirement income rather than equities. Psychologically, you know that if a bear market arrives early in your retirement, your equity holdings will have some time to recover. This knowledge is reassuring, and it may dissuade you from impulsive financial decisions.
Ask about the bucket approach today. It could be a great financial strategy to adopt for your retirement.
Jeff Hamm may be reached at 228-474-3427.
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
Securities sold, advisory services offered through CUNA Brokerage Services, Inc. (CBSI), member FINRA/SIPC, a registered broker/dealer and investment advisor. CBSI is under contract with the financial institution to make securities available to members. Not NCUA/NCUSIF/FDIC insured, May Lose Value, No Financial Institution Guarantee. Not a deposit of any financial institution.
1 – seattletimes.com/business/about-to-retire-heres-how-to-cope-with-stock-market-shocks/ [11/25/17]
2 – news.morningstar.com/articlenet/article.aspx?id=839521 [12/13/17]
When you buy a home, it’s important to look beyond the sale price and mortgage payment to set your budget. First-time homebuyers are sometimes caught off guard by overlooked expenses, which can create an uncomfortable finance pinch. Be sure you consider these one-time and ongoing expenses:
- Home Inspection. Before you close on your home, you’ll want to have it thoroughly inspected by a professional. Your lender may even require it. For a few hundred dollars, an inspection can uncover potential trouble such as structural problems or asbestos. If problems are found, you may need to pay another expert to provide an assessment. A good inspector can also tell you what to expect in terms of…
- Home maintenance. Experts recommend setting aside 1 to 3 percent of the home’s purchase price for annual maintenance. You may need to buy lawn care equipment or replace the roof, furnace or water heater.
- Taxes and insurance. Property taxes and homeowners insurance aren’t always included in mortgage payment calculators. Costs vary widely, depending on the value of your home and its location, but taxes and insurance together can easily total a few hundred dollars a month.
- Extra cash at closing. Your lender should give you a detailed estimate of closing costs. But beyond those, you may have to pay additional expenses, such as a prorated portion of property taxes or homeowners association fees that the seller has already paid.
- The move. Whether you hire professional movers for a few thousand dollars or rent a truck, buy boxes and recruit friends to help, moving costs money.
- Settling in. You may have to pay utility connection fees when you move in, plus utility costs may be higher than you were used to as a renter. You’ll probably want to replace the locks on all the doors. And you may need new window coverings, rugs and furniture.
Find the Right Mortgage
The experienced mortgage specialist at Navigator Credit Union can help you understand the true costs of homeownership so you don’t encounter any unpleasant surprises. We’ll help you find the right mortgage for your circumstances and budget. Contact a mortgage professional by calling 228-475-7300 or 800-344-3281, option #5; emailing Mortgage@navigatorcu.org ; or click here.
Memorial Day is coming up. The holiday marks the beginning of summer travel season for many people. According to AAA, more than 41.5 million Americans will travel this Memorial Day weekend. With more people on the road, it’s important to be patient and drive smart.
The Mississippi Department of Transportation has these reminders for motorists:
- Obey all speed limits and signs, especially through work zones.
- Always wear a seat belt.
- Never get behind the wheel under the influence of alcohol or drugs.
- Use your cell phone for emergency situations only.
According to the National Highway Traffic Safety Administration, 94 percent of crashes are caused by human error. One of the most important safety steps drivers can take is simply slowing down and paying attention.
Navigator Credit Union will be closed on Monday, May 28 in observance of Memorial Day. Remember, ’N Touch online and mobile app are available 24/7 to meet Members’ banking needs.