As baby boomers age, retirement income has become a hot topic. Most of the discussions revolve around determining the best way to structure a retirement portfolio to generate the maximum income from it. I know of no studies that specifically address this issue from a quantitative standpoint, but from a psychological perspective, the idea of dividing assets into buckets has been gaining favor. In this transcript from Consuelo Mack’s Wealthtrack program, several financial experts discuss retirement income ideas and I note that the buckets idea is mentioned frequently.
Although holding up to five years worth of spending in cash is not likely to optimize the overall portfolio return, the idea of buckets is designed to allow investors to hold growth assets with less fear. Spending comes from the liquidity bucket, which given the mind’s natural tendency to segment things, does not seem as connected to the growth part of the portfolio as when the assets are combined in one large portfolio. The investor may have a tendency to leave the growth bucket alone, perhaps using occasional gains to replenish the liquidity bucket.
The additional psychological advantage of separating the liquidity and growth buckets is that investors may not feel pressure to liquidate when the market is weak. If they feel that their spending needs for the immediate future are covered, they may be more willing to let the growth investments fluctuate-and not sell out at inopportune times. If using the bucket approach leads to better investor behavior in the long run, I’m all for it.
