Mutual Funds and Bucketing

At least 1/3 of advisors are now moving towards a bucketing approach to retirement income. Bucketing involves a time-segmented approach to generating retirement income. Assets are earmarked for different time periods of use over a client’s lifespan.

Mutual funds are a great way to fill any one of a planner’s buckets. There are mutual funds for short-term means and for long-term means. Mutual funds of any kind always offer professional management and liquidity.

Before deciding what buckets to create and how to fill them, planners first identify cash needs for retirement and current source of income for retirement. Buckets are then built around what is needed to make up the difference. The difference between income and expenses is known as “the retirement shortfall.” Typically advisors cascade assets among different buckets and as short-term buckets are used up, then advisors can withdraw funds from the longer-term buckets. Mutual funds make this process easy because of their liquidity.

Many planners prefer a “total return” approach to retirement planning because it is difficult to match future assets with liabilities due to the unpredictable nature of expenses.

See David Adler, Mutual Funds: Perfect Tools for Bucketing, Financial Planning Newsletter, Mar. 2012.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.