Safe Buckets Smooth the Volatility
Although it is normal to have corrections during any given year, 2022 is off to a rocky start in the market. The S&P, from peak to trough as of 1/21/22, is down roughly 8%. Volatility can be troubling to many clients in retirement who worry about their savings lasting throughout their lifetime. One solution to smooth out the volatility and reduce those worries is the use of a “safe bucket”.
What is a safe bucket? It is simply having part of your retirement portfolio in a safe place. If you are retired, or about to retire, and your entire portfolio is invested in stocks, you may be feeling concerned. During my career as a financial advisor, I have advocated for keeping roughly 3-5 years’ worth of spending money in a safe place. Let’s say that you need to spend $50,000 from your portfolio on an annual basis. You should have around $150,000-$250,000 in something other than stocks. This could be a combination of many other types of investments, like cash, CDs, bond mutual funds or other types of securities with less risk. In this example, if a client had $1,000,000 in retirement savings, that means that around $750,000 could be invested in stocks.
If this client called me during market volatility and expressed concern about their investments, I would agree with them that it is no fun to see our stocks go down during this time. With a safe bucket, however, the good news would be that this money doesn’t need to be spent for quite some time. Since we have a safe bucket in place in our retirement portfolio, we can safely spend from it when our stocks are down.
A good way to keep your “safe” investments separate from your other securities would be to create an account just for that purpose. A safe bucket could be an actual separate account where you only have safe investments in that account and do your spending out of it. When times are good, you can move some of your earnings from your other account(s) and replenish your safe bucket. This is simply rebalancing. You may already have this in place if you have a typical retirement portfolio based on your risk tolerance, such as a 50/50, 60/40 or 70/30 mix of stocks vs. bonds in one or more accounts but they are typically combined in one account
When the markets are going great, no one thinks much about where their funds are coming from. During a correction, however temporary it may be, it may be a good time to review your withdrawal strategy with your financial advisor. It could be that establishing a safe bucket or reviewing the size of the one you already have in place, is a consideration.