Here’s how much stocks, bonds, and cash to keep in retirement

Here’s how much stocks, bonds, and cash to keep in retirement

There are many different approaches and strategies for this retirement Investments you might address. But how can you tell if a particular strategy is working for your situation?

As you evaluate different approaches, consider how each strategy is put together and determine if it meets your unique needs, resources, and opportunities risk tolerance. If you’ve ever been interested in what’s known as “bucket strategy,” you’re in luck – morning star has put together three specific bucket strategy examples for you to review.

A financial advisor can help you with retirement planning and portfolio management. Find a fiduciary advisor today.

Bucket Strategy Basics

Here's how much stocks, bonds, and cash to keep in retirement

Here’s how much stocks, bonds, and cash to keep in retirement

If you are not familiar bucket strategycalls for structuring your retirement savings into three buckets based on longevity and when cash is needed.

The first bucket holds your cash, cash equivalents, and other liquid assets that are earmarked for the early years of retirement. A medium-term bucket focuses primarily on Bind. A third, long-term bucket Shares is designed to encourage growth. When the cash bucket is depleted, medium-term assets are sold to replenish it, while long-term assets are liquidated to replenish the medium-term bucket.

“The bucket approach to retirement portfolio planning is not designed to provide the best possible investment returns,” writes Christine Benz, Morningstar’s director of personal finance and retirement. “It won’t – almost by definition. Instead, the bucket strategy is geared toward true retirees to help them raise their needed cash flows regardless of what happens to their long-term holdings.”

How to determine your asset allocation using the bucket strategy

Here's how much stocks, bonds, and cash to keep in retirement

Here’s how much stocks, bonds, and cash to keep in retirement

With the bucket strategy, Benz created three model portfolios for different risk tolerances. The three approaches rely on exchange traded funds (ETFs) held in tax-deferred accounts, with withdrawals used to cover some or all of a retiree’s living expenses. The risk of the portfolios ranges from aggressive to moderate to conservative.

Here’s how the three model portfolios perform depending on how they allocate their assets across cash, bonds, and stocks:

Aggressive. Designed for a retirement provision of probably more than 25 years, for investors with a high willingness to take risks:

  • Cash: 8% of assets are held in cash for the 1st and 2nd year of retirement

  • Bind: 32% of wealth is held in bonds for years 3 to 10 of retirement

  • Shares: 60% of assets are held in stock for Year 11 and beyond

Moderate. Designed for an expected retirement of 15 to 25 years, it is aimed at investors with moderate risk tolerance.

  • Cash: 10% for the 1st and 2nd year of retirement

  • Bind: 40% for years 3-10 of retirement

  • Shares: 50% from class 11.

Conservative. Designed for a retirement that is expected to last less than 20 years, it is aimed at investors with low risk tolerance.

  • Cash: 40% for 1st and 2nd retirement age

  • Bind: 48% for years 3-10 of retirement

  • Shares: 12% for the 11th year and beyond

In terms of adjusting strategy, much will depend on the level of spending in retirement, but the focus is on the cash bucket as it serves as a cushion to hedge against market shocks. A low-spending investor who might start with withdrawing as little as 3% could fund an aggressive portfolio with just 6% of their holdings in cash. Typically, however, retirees tend to spend more in the early years of retirement and then scale back spending as they reach their retirement goals and as they age.

bottom line

The bucket strategy is an intuitive and relatively straightforward approach to allocating your wealth across cash, bonds, and stocks in retirement. Morningstar has three model portfolios asset allocations You can use depending on your risk tolerance and how long you expect to live in retirement.

Tips for managing your portfolio

  • A financial advisor can help you choose investments, rebalance your holdings if necessary, and manage your tax liability. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three verified financial advisors operating in your area, and you can interview your advisor matches for free to decide which one is right for you. When you are ready to find an advisor who can help you achieve your financial goals, Get started now.

  • SmartAssets Asset Allocation Calculator can also help you determine how to allocate your wealth between stocks, bonds, and cash based on your risk tolerance.

  • While rebalancing To bring your portfolio back into line with your risk tolerance, keep an eye on costs. Can you cover the fees you may have to pay upfront to buy a new asset or sell an existing investment? It is also advisable to examine the expense ratio of the securities you are interested in. This number indicates what percentage of your assets are used for coverage Management Fees.

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