Our bucket approach to earning income in retirement
Asset accumulation seems easy but what about asset decumulation? The solution might be: you might want to consider a bucket approach to earning income in retirement.
One of my favourite books about generating retirement income is one by Daryl Diamond, The Retirement Income Blueprint. This is one of the best I’ve read.
It is my hope to start exploring this subject more on my site – including for my own benefit – to figure out what earning income in retirement can and needs to look like for us.
Here’s the modified bucket approach we’re considering below: how to organize our personal portfolio to address certain income needs and manage some market risks in three (3) buckets:
- cash savings
- income from dividend paying stocks
- distributions from and selling equity Exchange Traded Funds (ETFs) over time.
Quick notes: Table is current to the time of this post. I will modify this table over time. The best approach for any one person or couple will depend on a host of factors that one My Own Advisor blogpost cannot include nor standardize.
In more detail for us:
- Bucket 1 is cash. It’s simply a large emergency fund.
- Bucket 2 is earning income/cash from dividend paying stocks. As we work part-time, we hope to supplement that income earned witih dividends and distributions to pay for living expenses – income earned inside some key accounts (such as our non-registered account(s), TFSA(s), and RRSPs).
- Bucket 3 is earning income/cash from equity ETFs. This income will come from mainly registered accounts over time.
The purpose of having buckets is simple but effective: each of these buckets has a defined purpose based on what or when the money is for: now, (short-term), intermediate (near-term) or long-term (multi-year or decade).
My approach is a bit of a deviation in semi-retirement: I don’t want to use cash savings in the short-term unless I have to with the combination that I won’t be forced to sell assets/stocks during a down market to fund your annual withdrawals.
How to Use the Retirement Bucket Strategy
You’ll need a plan for your retirement income bucket strategy. Here are some considerations…
The Immediate (Short-Term) Bucket
Cash and other liquid investments are in the immediate, or short-term, bucket. These investments include cash or GICs or similar assets. You’ll fill this bucket with investments that are liquid – easy to access for spending without much tax complications. The goal of this bucket is not income – rather – to reduce investment risk.
Ideally, some experts suggest you’ll want to hold enough cash in the immediate bucket to pay for up to two years of expenses.
So, if you plan on spending $50,000 per year in retirement, then you’ll want to try and reach $100,000 in this bucket to cover two-years worth of expenses.
The Intermediate (Near-Term) Bucket
This middle bucket is usually designed to cover expenses in years 3-5.
Money in the intermediate bucket should be expected to grow.
Considerations include common stocks, longer-term maturity bonds, and potentially some growth stocks although even in a 3-5 year equity span lots of stock growth could be hard to come by!
The Long-Term (Multi-Year) Bucket
Long-term investments are those that mimic historical stock market returns – ideally measured in decades to recover from any near-term storms. These assets are intended to grow your nest egg.
For any multi-year or ideally multi-decade investing time horizon, you might want to consider plain vanilla ETFs or a diversified portfolio of stocks. I hold a few ETFs for that reason.
Some other retirement income factors and assumptions
Government benefits – CPP and OAS
You’ll note in my income table above I have not yet included any Canada Pension Plan (CPP) income or Old Age Security (OAS) income in these tables. No doubt many older Canadians including myself will earn some from each.
Given both government benefits include some inflation protection (CPI) I personally consider CPP and OAS very bond-like.
For this reason we have a tilt towards equities in our personal portfolio and likely always will. This tilt exposes us to more market volatility but it should also provide us with better (higher) longer term returns than fixed income.
When to take CPP or OAS?
This will allow us to defer CPP or OAS, earn more fixed income as we get older by deferring those benefits, and potentially help manage our taxes accordingly.
Workplace benefits – pensions
My wife and I are both very fortunate to have some workplace pensions to draw from in our future. Although these pensions are secure the income from them has yet to be fully determined.
Conservatively, I anticipate my (defined benefit) pension income will be a few thousand per month eventually. This pension is adjusted to inflation.
I anticipate my wife’s pension will be less; maybe $15,000 per year starting in her mid-50s.
Working part-time in our 50s will help close the income gap between leaving full-time work and when these pensions will kick in.
Personal benefits – working in retirement?
Isn’t retirement supposed to be about not working?
It can be. Not for me.
My wife knows I never plan to retire in the traditional sense. I intend to work as long as I’m physically and mentally able to, into my 60s or beyond. This may or may not be for any money at all.
I believe working on your own terms can have a number of benefits.
The gents who wrote Victory Lap Retirement can likely attest to that. There can be social, physical and mental growth that comes from working. In that book, the authors highlight some form of “victory lap” career (i.e., working on your own terms) can provide a number of benefits when the main motivation is gone – you don’t need the money.
Financial independence can provide a number of benefits whether you decide to retire early or not. Working on your own terms can be in the form of working part-time, working seasonally, starting your own business or volunteering your time and skills. As they say working can be better when you don’t need the money. I hope to experience that someday….
Why does the bucket approach work?
A few reasons come to mind:
1. There is less need/urgency to navigate any sequence-of-returns risk – selling assets after they have fallen in price. You have 1 or more years’ worth of cash to curb that risk. Most historical evidence suggests a bear market – which is a deeper, longer decline in value than a correction – tends to last up to 18 months.
Other source: List_of_stock_market_crashes_and_bear_markets
2. I believe it’s comforting. Retirees don’t need to worry about the possibility of having to liquidate assets at a bad time and therefore this helps investor behaviour via psychological safety.
3. I believe it’s easy to implement. No portfolio rebalancing and you only need to keep a modest cash wedge relative to your total portfolio value.
Our bucket approach to earning income in retirement summary
We believe our bucket approach for earning income in retirement will be robust and will provide us with options. Ultimately you need to determine what’s best for you personally and financially too.
I wish you well.
Stay tuned to more blogposts on this subject and as my thinking matures.
What’s your income plan for retirement? Do you have one? Are you already there and are you accomplishing your needs and wants? Drop me a comment and share your thoughts.