How pre-retirees can transition to a bucket strategy

New portfolio bucketers need to take their own portfolio spending, tax situations and risk appetites into account.

Christine Benz 10 August, 2018 | 5:00PM

The bucket approach to retirement portfolio withdrawals is not a one-size-fits-all solution. Because bucketing revolves around setting aside your near-term cash in something pretty liquid, your portfolio withdrawal amounts are the big determinant of how much to put in each bucket. A retiree with a higher spending rate will necessarily have more in safe securities than one who's taking extremely modest withdrawals.

Moreover, the tax character of your investments--and the sequence with which you'll tap those various pools of assets in retirement--will play a big role in how you asset-allocate those subportfolios. The account(s) that you'll tap for your ongoing cash needs should hold a healthy component of cash (that's what the bucket strategy is about, after all), whereas assets you'll hold later should be positioned more aggressively.

Finally, you shouldn't need to reinvent the wheel when it comes to your holdings in order to implement a bucket strategy. Unless you're planning a major overhaul of your portfolio for some other reason--for example, you'd like to switch from actively managed funds to index exchange-traded funds--you shouldn't need to start from scratch when adopting a bucket approach. Making changes can be costly and trigger a tax bill, so it's healthy to view bucketing as a gradual transition rather than a radical transformation.

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About Author

Christine Benz

Christine Benz  Christine Benz is Morningstar's director of personal finance and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances and the Morningstar Guide to Mutual Funds: 5-Star Strategies for Success. Follow Christine on Twitter: @christine_benz.

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