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October 07, 2007 at 04:00 PM
One income planning approach that’s gaining traction with some financial planners is a system of creating different buckets of income based on when income is needed and the client’s risk tolerance.
A two-bucket system is used by George Middleton, a financial advisor with Limoges Investment Management, Vancouver, Wash. Bucket 1 is designed for money needed in the next 1-3 years, he says. This money is invested very conservatively; as money in the conservative bucket is used, that bucket is refilled from the long-term bucket in which best performing asset classes are used first, Middleton explains.
If there is a market decline, then the client’s conservative bucket is allowed to drain until the market reverses before it is refilled, he explains. “When the cycle presents opportunities the conservative bucket is filled again.”
Usually, there are at least one or two asset classes that are performing well enough to be used to refill the bucket, he says. As an example, Middleton says that from 2000 through 2002, real estate investment trusts and bonds were doing well enough to be a source of liquidity to weather the down market. The approach is also one that Middleton says his clients understand.
Dave Zumbusch, a financial advisor with Sportsmen Dream Financial, Buffalo, Minn., uses software which designs a portfolio to make monthly withdrawals using the bucket approach. The portfolio allows for monthly withdrawals with raises every 5 years. This preserves the principal for a 30-year time period, he says.
