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Advisors Want Clients To Have Buckets Of Money For Retirement

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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.

Zumbusch says he starts by assessing what a client wants to accomplish and the assets available. Then, with the help of software, he creates 6 buckets of money. The first bucket, he explains, provides 5 years of monthly income and is in guaranteed fixed income and cash equivalents with no market risk. The second bucket lasts for years 6-10 and is usually a bond or income portfolio. Bucket 3, he continues, consists of equities. Buckets 4 through 6, according to Zumbusch, gradually become more aggressive as the time period to access funds in those buckets increases. For instance, Bucket 6 will not be accessed for 25 years, and so can take an aggressive position.

The bucket approach, according to Zumbusch, makes it possible to start out with a 5.65% withdrawal rate and build in 3% raises every 5 years. A decline in the equities market does not immediately impact income because those dollars will not be accessed for a minimum of 11 years and up to 20-25 years, depending on the bucket, he adds. Conversely, if stock or bond markets go up, then money is moved over to Bucket 1 to keep the proper 5-year funds available, Zumbusch says.

Bart Boyer, a financial advisor with Parse Financial, Irvine, Calif., notes the flexibility of using investment buckets when mapping out income for a client, particularly the ability to switch between the stock and fixed income allocations.

This article originally appeared in the September 2007 issue of Income Planning, an online publication of National Underwriter Life & Health. You can subscribe for free to this monthly e-newsletter by going to