When you implement a buckets strategy, you have three separate sources of retirement income:
- A savings account that holds approximately three to five years’ worth of living expenses in cash
- Fixed-income securities, including government and corporate bonds or certificates of deposit
- Equity investments
With this approach you draw from your savings account to cover your expenses and refill that “bucket” with money from the other two. This enables you to avoid selling assets at a loss. When you refill your savings account, you do so either by selling stocks if the market is up or selling your fixed income securities if they’ve performed well. If both stocks and bonds are down, you continue to draw from your savings.
The major benefit of this approach is that you have more control over when you sell investments and can potentially grow your investment account balance over time. However, it can quickly become time-consuming, and you still need to use another method to determine how much you can afford to spend each year.
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