Ensuring a Long Retirement with 'Buckets' / a strategy that employs three "buckets" to addres short-, medium- and long-term retirement needs.

Jesse Sunenblick for the Wall St Journal writes: The couple was nearing retirement with ample assets: They were selling their consulting business for $5 million and already had another $1.5 million in investments. 
 

Still, they were conflicted about an investment strategy. They worried about the effect of inflation on a long retirement if they didn't invest aggressively enough, but they also were concerned that another market downturn could decimate their savings. 

They wanted their money to be invested in a way that helped ensure a yearly income after taxes of $85,000--something they would need for several decades, as the husband was 64 and his wife just 55. 

Their adviser, Scott Barker, came up with an investment and income strategy that employed three "buckets" to address their anxiety and their short-, medium- and long-term retirement needs. Mr. Barker is a senior financial adviser at Seattle's Moss Adams Wealth Advisors, which manages $1.6 billion for 900 clients. 

Mr. Barker took a close look at the couple's other types of income. Besides the $5 million sale price, the business they were selling would provide $65,000 a year in rental income for five years. The wife also had a pension from a prior job, which included survivor benefits for her husband if she died. Both spouses could also claim Social Security benefits. 

The adviser and his clients sat down to discuss longevity and a gamut of spending issues. He suggested planning for the wife to live to age 95. During that 40-year period, the couple would need to address not just living and travel expenses but also, among other things, the college costs of the wife's children from a previous marriage. They also wanted to leave up to $300,000 to various charities. 

From this discussion, Mr. Barker identified three distinct buckets for retirement income. During the first five years of retirement, the wife's pension and the couple's residual business income would provide about $90,000 annually. "That told us that we didn't need to take any money out of the investment portfolio for the first five years," says Mr. Barker. 

For the second bucket, Barker invested $1 million in individual bonds with maturity dates between five and 10 years. These bonds would provide the supplemental income the couple needed from years five through 10 of their retirement. 

Finally, he placed their remaining money in a diversified portfolio of stock funds and commodities. There were assets the couple could tap after the 10-year mark to replenish their short-term and medium-term buckets. Each year, the couple and their adviser would assess market conditions, interest rates, taxes and changes in expenses to determine the best strategy for shifting funds between the buckets, while maintaining the option to use some equity exposure to stay ahead of inflation. 

The plan eased the clients' worries. They were confident they had enough money to last through their retirement and were free from worry about day-to-day stock market volatility because their short- and medium-term income needs were covered. 

"We constructed a portfolio with more of a growth posture," said Mr. Barker. "But they had peace of mind about not being heavily invested because they knew when they needed the money."