Personal Finance

You can finally head off into the sunset, enjoying your hard-earned financial security without a care in the world. Alas, not quite. Now you shift your focus from helping your money grow to making it last.

Create investment buckets

At this stage, you must walk a fine line in building your portfolio. “Retirees who are heavy on stocks must be comfortable with the market risk,” meaning the risk of stock prices falling, says Maria Bruno, senior investment strategist with Vanguard’s Investment Strategy Group. “The flip side is that if they have too little in stocks, their portfolios may not keep up with inflation.”

Using a bucket system is one way to balance both risks. Here’s how it works: Hold one year’s worth of expenses in cash. That’s your first bucket. Hold enough money in your second bucket to cover your expenses for the next nine years, and invest this in high-quality bonds or a fixed annuity (our model portfolio assumes you are withdrawing 4% per year, meaning this bucket accounts for 36% of your port­folio). Your third bucket may be invested in stocks and other aggressive options. If a bear market roars, you can sleep easy knowing that you don’t need to touch your stock holdings for a decade (for more strategies to make your money last, see 12 Strategies to Generate Income in Retirement.).

Invest for income and growth

In a perfect world, you could hold a conservative portfolio of bonds and live comfortably off coupon payments. In the real world, you need to get a bit more creative. “In a higher-interest-rate environment, spending only income could be feasible, but today it’s not,” says Bruno. Avoid the temptation to load up on junk bonds and stocks with superhigh yields to boost your portfolio’s payout to 4%. Instead, you need a mix of investment types to provide both income and capital appreciation. The second bucket in our model portfolio holds two conservative bond funds instead of higher-yielding options because that’s the money that lets you sleep at night. Consider replacing some of your taxable bond funds with tax-free municipal bond funds if you have a lot of money in taxable accounts and are in a high tax bracket. Riskier income investments, including small allocations to REITs, junk bonds and emerging-markets debt, are sequestered in the third bucket. The third bucket also houses a 30% allocation to broad stock index funds, so you’ll always capture the market’s growth.

Refill your buckets as needed

Replenish your buckets periodically by trimming top performers in your third bucket and by selling bond-fund shares as necessary to refill the cash bucket. If the market tanks, hold off on touching your stock funds until they recover, even if doing so means you draw down your second bucket for a few years to pay for living expenses.

Portfolio

Bucket 1

4% Cash

Bucket 2