Think about investment plans in terms of buckets
My husband and I are getting ready to retire next year. We have decided to use the bucket method for funding part of our retirement. (We will have a $50,000 income before distribution from investments.) The first bucket is for immediate spending during the first five years (this bucket must be safe). The second bucket is for years six to 10 (this bucket must be able to grow and have low risk), and the third bucket is for growth (this bucket would not be tapped for at least 10 years). What type of investments would you suggest for each bucket? — S.N., by e-mail
Buckets are a convenient way to think about investment risk and time. Here’s what I suggest:
Bucket 1: a ladder of CDs or other secure interest rate investment, with the money you need in each year maturing on schedule. You could also explore CD-like annuities, which often yield a bit more, and yields on deposits at credit unions.
Bucket 2: a low-cost balanced fund such as Vanguard Wellington, current yield 3.1 percent according to Morningstar, or a 50/50 combination of Vanguard GNMA and Vanguard Windsor. The second choice would give you the option of selling bonds or stocks when circumstances dictated a withdrawal.
Bucket 3: a low-cost global eq- uity fund, such as the Vanguard Total World Stock Index. An alternative with a higher commitment to the U.S. and a small (15 percent) commitment to fixed income would be Fidelity Four-in-One Index fund.
The buckets, evenly divided, would result in a portfolio that was slightly more than 50 per- cent equities.
It would have a highly liquid front end for meeting current and emergency expenses. It would also be very inexpensive to manage.
The same general idea could be tailored to different platforms to further control costs. By using a major company such as Schwab, Fidelity or Vanguard, you can also integrate your checking and credit card use, thus avoiding having deposits at a “too big to fail” bank.