The Anna Maria Island Sun Newspaper

Vol. 15 No. 46 - September 16, 2015

BUSINESS

Anna Maria Island Sun News Story

A bucket plan for your bucket list

Investment Corner

For most in retirement or beginning to prepare for retirement, there will be two types of income – guaranteed and investment. Guaranteed income includes Social Security or pensions earned during the working years. Investment income is generated by our savings which ends up invested in stocks, bonds or other productive investments. There are two primary ways to approach retirement income planning for the investment plan, which we’ll explore here.

Social Security and pension income sources are generally secure and may have inflation adjustments built in depending on the pension plan issuing the payments. Income from investments can range from dividend and interest payments to capital gains from price appreciation or even rental income from investment property. It is the investment income portion that requires the most planning to ensure the assets and income last for your entire retirement at a level which allows you a dignified existence, and hopefully the lifestyle you desire.

When designing your plan for drawing income from your investments, there are two approaches to consider. Probably the most widely used is the Systematic Withdrawal Approach. In this method, the investment pool is viewed as one amount and a percentage of the value is used as income each year. The widely accepted safe withdrawal rate is in the range of 4 to 5 percent, and the amount can be adjusted for inflation as the cost of goods and services goes up.

Somewhat less well known is the Bucket Approach. In the bucket method, specific investments are made for specific times of your retirement. It is a process of matching investments to your need for income, considering the best time horizon for each type of investment.

Bucket #1 is known as the short-term bucket, it is designed to provide safety of principal and income for the first five years of the plan. Investments commonly used in this phase are annuities that provide guaranteed income, short-term government bonds and even certificates of deposit. The idea is that Bucket #1 will be used up during the first five years and that higher yielding but more aggressive investments in Bucket #2 and Bucket #3 will have time to grow.

From year 6 to years 12 through 15, the income from Bucket # 2 is used to replace the income from Bucket #1, which may now be empty with the possible exception of lifetime annuity income, if annuities were purchased. Bucket #2 commonly holds longer-term bonds, which have higher yields, real estate related investments and possibly very conservative stock holdings.

The beauty of not relying on Bucket #3 until the 15th year or beyond is that you fill Bucket #3 with the investments that provide the most growth potential, but which may also periodically be the most volatile. Investors who understand that they don’t need to access Bucket #3 for a long time are less likely to panic and sell their stocks during a market correction. The science behind the system is based on the fact that there has never been a 15-year period of time where stocks lost money. In fact, the average return for stocks over all 15-year periods is about 8 percent a year.

The main advantage of the bucket approach is that the investor can identify specific investments supporting specific income needs during particular periods of time. This should result in a higher level of confidence and more sound decision making.

Tom Breiter is president of Breiter Capital Management, Inc., an Anna Maria based investment advisor. He can be reached at 778-1900. Some of the investment concepts highlighted in this column may carry the risk of loss of principal, and investors should determine appropriateness for their personal situation before investing. Visit www.breitercapital.com.


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