4 Reasons Bucket Planning is Good For Retirement Planning
No, I’m not talking about a “bucket list”. I am talking about bucket planning. This is where we think about investing on a time line of when we need money, what long-term markets have often looked like and how to allocate money over a period of time for different uses.
Life expectancy has gotten longer and longer. Today when someone reaches 65 years old, there is a reasonable chance they will still be alive when they are 85. In ten years, life expectancy is likely to be even longer. This means that we need to plan for long retirements where money will be needed over different time frames.
Bucket planning can be a useful activity. In some instances we call this “income for life”. The purpose of bucket planning is to improve the probability through planning that your money will last for as long as you might need it. Below are some of the reasons I believe bucket planning makes sense:
You are forced to think about your lifestyle for a long period of time.
When we plan for income over a twenty-year period or more we tend to think about different stages. When you first retire, you might want to travel more, but as you age, you could plan for a little slower lifestyle.
Bucket planning helps you realize that money you need today should be invested differently than money you need in the future.
If you are planning for a period of twenty years you should think about different asset classes that are appropriate for those different time periods. You should also have a regular conversation at least every three years where you adjust your buckets based on changes in your life.
Bucket planning allows you to learn about different investing styles.
In my opinion there are two things one should consider as they build an investment strategy. Those two things are secular markets and investment vehicles. Both are important when you plan for a long life of income needed from investments. I believe that bucket planning and the conversations that come from this type of planning naturally encourage conversations on both of these items.
Bucket planning tends to be about income.
When you retire you move from having active income from your job or business to passive income where income comes from investment growth and earnings. Making the transition from active to passive income is difficult for many. Using the correct vehicle in bucket planning allows you to bring investment activities into play that in some cases mimic active income even though they come from investments.