One of the enduring debates among financial advisors has been the preferability of the traditional asset allocation method versus the “bucket approach” to retirement-income planning.
In the traditional approach, the client’s portfolio is set to some diversified allocation–60/40 equities/fixed income is the classic blend–and income withdrawals are managed around that standard.
The bucket approach divides the clients’ funds into buckets or separate pools of money that match each bucket’s volatility to the client’s goals and risk tolerance. Clients with modest assets, for example, would have most or all of their assets in very low-risk buckets; wealthier clients could create additional, riskier buckets.
UBS Wealth Management Research recently published a report, “Retirement Planning Now – Risk: How Much Is Enough?” It discusses the firm’s adoption of the bucket method. The full report is available online; here are some of the highlights.
In the past, the traditional investment planning strategy to restore balance to a retirement portfolio involved examining the retirement “trilemma,” which includes boosting savings (working longer), scaling back goals and reassessing the investor’s risk appetite.
In this new approach, as outlined by UBS, investors should segment their portfolios to help them identify how much financial risk they need to take on to meet their retirement goals. With this in mind, UBS suggests the following “buckets” when planning for retirement:
o The first risk bucket should contain funds required to fulfill the liquidity needs for an individual over some predefined time horizon. The sole purpose of this bucket is to provide an investor with a level of security in any contingency.