Several years ago there was a movie called “The Bucket List”, which set the whole country to thinking about all the big things they would like to do before they ‘kick the bucket’. Most people’s dreams include travel to exotic destinations and feats of strength and courage. You know, like climbing Mount Everest or Kilimanjaro or jumping out of an airplane.
I have none of those adventurous things on my list. In fact, I’m a pretty simple man and the most important thing for me is having a solid financial foundation for my family in the event I should ‘kick the bucket’ earlier rather than later. I recommend this kind of bucket list for my clients too.
The bucket list I prefer is one that will pretty much assure clients that they will be able to weather the ups and downs of the stock market and feel secure and stay invested for the long-term with the help of Long Term Growth Accounts. What follows is some of the thinking and details of my favorite ‘bucket list.’
The All-Important Bucket 1
This first bucket helps clients meet near-term living expenses for one year or more in the event of some unforeseen circumstances with cash and available liquid assets. The goal of this portfolio sleeve is to stabilize principal to meet income needs not covered by other income sources. To arrive at the amount of money to hold in bucket 1, start by outlining spending needs on an annual basis. Subtract from that amount any certain, non-portfolio sources of income such as Social Security or pension payments. The amount left over is the starting point for bucket 1: That’s the amount of annual income bucket 1 will need to supply.
If you are more conservative and can multiply that figure by two or more, it never hurts to have access to more cash. Alternatively, you might decide to keep one year of living expenses in true cash and one or more year of living expenses in a slightly higher-yielding alternative holding, such as a short-term bond fund. Once retired it might help to consider including an emergency fund within bucket 1 to defray unanticipated expenses such as car repairs, additional healthcare costs, and so on.
Bucket 2 and Beyond
Bucket 2 contains five or more years’ worth of living expenses, with a goal of income production and stability. Thus, it’s dominated by high-quality fixed-income exposure, though it might also include a small share of high-quality dividend-paying equities and other yield-rich securities such as master limited partnerships. Income distributions from this portion of the portfolio can also be used to refill bucket 1 as those assets are depleted.
The longest-term portion of the portfolio, bucket 3 is dominated by stocks and more volatile bond types such as junk bonds. Because this bucket is likely to deliver the best long-term performance, it will require periodic trimming to keep the total portfolio from becoming too equity-heavy. By the same token, this portion of the portfolio will also have much greater loss potential than buckets 1 and 2. Those portfolio components are in place to prevent the investor from tapping bucket 3 when it’s in a slump, which would otherwise turn paper losses into real ones.
When To Make Your Bucket List
The sooner you start thinking about your bucket list and taking action, the better. Certainly, you’ll want to be in a position to enact your retirement savings plan a minimum of five years prior to retirement. And, if you have exotic travel plans in addition to your financial bucket list, you’ll require significantly more time to make sure you have the income for life that will allow you to pursue all of your dreams.
This content is provided for informational and educational purposes only. The information, analysis and opinions expressed herein reflect our judgment as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation. All investments carry a certain risk and there is no assurance that an investment will provide positive performance over any period of time. Information obtained from third party resources is believed to be reliable but not guaranteed. Past performance is not indicative of future results.