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Making a bucket for shorter-term income needs can secure peace of mind (and prevent poorly timed sales) during volatile times, says noted planner Harold Evensky.

Transcript

The Bucket Approach for Retirement Income Morningstar Retirement Focus with Christine Benz Christine Benz: Hi I’m Christine Benz for Morningstar.com here today with Harold Evensky. Harold is President of Evensky & Katz Wealth Management. Harold thanks so much for being here. Harold Evensky: Thank you. Christine: Harold you were really a pioneer in terms of what is now been called this bucketing concept for managing retirement income can you talk about the bucketing approach and why you think make sense for retirees for managing their portfolios? Harold: Yeah the fact of the matter it really makes sense for anyone. I think we believe that the risk of investing in the market is the short term volatility of the market so we develop back in the early 80s I think we call our 5 year mantra, 5 years, 5 years, 5 years simply the means. We don’t believe anyone should invest money that they’re going to need the next 5 years too much risks. Christine: Stocks or bonds? Harold: Stocks or bonds too much risk that they’ll need it a long time. Christine: Right. Harold: So we carve out for any lump sum. Someone says gee I want to buy a second home three years from now. Well carve that out of the investment portfolio and put it in short term bonds or cash. When it comes to retirement income someone says I got a million dollars. I need 50,000 year out and try to figure it out. Carving 5 years of cash flow is too much opportunity cost all that money sitting in cash so we experimented and came up with 2 years. So it’s okay put 2 years in cash, take the other and then 900,000 in invested in a total return portfolio what that does is you can take that cash and sell it up to pay a check ones a month like a payroll check. The market can be volatile but you know when your grocery money is coming from so you’re not going to get panic on what’s going down as you manage your investment portfolio gets out of whack and you do rebalance you look over and say gee its coming down let me move some money over so you can do much more cost in tax efficient managing portfolio. You’re not going to have to sell it a long time you can sleep through volatile times as a client said make sure I understand I don’t have to be happy but I don’t have to worry that’s no one is going to be happy losing money but we did that prior to the 87 crash plants come through well tech bust and recently so it’s a very effective strategy of minimizing the risk of taking the money out the wrong time. Christine: Right. Harold: But its really, really simple idea. Christine: Right. Harold: So now I think I’ve heard some advisers putting forth as many as 8 separate buckets, how many buckets say you’re do it yourself investor managing your own retirement portfolio what would be a sensible number of buckets? Christine: Basically 2. Harold: 2 keep the cash out. Christine: Short term. Harold: Design a balance that we don’t have time to kind of go in a multiple buckets but the risk of a multiple bucket is you have one for college and you’ve got a goal before that that you want to pick a trip and you don’t do it because you don’t have enough money and then you find over funded for the other one you can’t go back and take the trip later so we believe that the overall planning ought to be holistic and the cash the short term want to be carved down so plus most people its easy to understand the two buckets in manages too. Christine: You just have to be sure to periodically fill up that near term market? Harold: Right. Consistently be reviewing but if you’ve got an investment portfolio there’s always some reason you need to be making adjustments rebalancing it. You fire the manager you got some excess so say once a quarter and just kind of look over and say gee I’m doing this anyway let me take the opportunity to fill my bucket back at my cash bucket. Christine: So within that longer term total return bucket you would presumably have a whole range of investment options ranging from quite conservative to your long term stock holdings? Harold: Right the allocations the amount between bonds and stocks and the question this is going to be a function of what do you need in terms of where we turn to long term to achieve your goals that’s going to turn in that allocation so maybe very aggressive. We got lots of money that maybe very conservative but that’s unique each individuals. Christine: Yeah well thanks Harold it seems like a great approach that you are an early pioneer of. Harold: Of course. Christine: And it’s very intuitive and makes a lot of sense so thanks for sharing it with us. Harold: Thank you. Christine: Thanks for joining us I’m Christine Benz for Morningstar.com.