Running out of money is a common fear among retirees. It seems like the root of the fear is less about a concern for the individual’s personal well-being and more about not wanting to be a burden on their family or others.

As Jon discussed in part 2 of this retirement income series, there are potential risks of running short on retirement income by either over or under allocating your retirement investment savings to stocks. The investment allocation that has historically worked well to produce an inflation adjusted income stream throughout retirement is having between 50 and 60 percent of your retirement savings in a well-diversified stock portfolio.

You might be thinking, in theory that sounds good, but how does getting income from my retirement savings really work?
At Master’s we use what is called a “bucketing approach”. We divide your retirement savings into two buckets (investment portfolios). The amount of money that goes into each bucket is determined by projecting how much money you will need in the “early years” of retirement (first 10-15 years) and the “later years” of retirement. The money for the early years goes into “bucket one” and the money needed for the later years goes into “bucket two”.

Bucket one is invested conservatively and is used to derive the necessary regular income via a systematic withdrawal. The second bucket is invested more aggressively and is left to grow for your income needs later in life.

The bucketing approach has both strategic and emotional benefits. From a strategy standpoint, bucket two with the larger stock allocation could withstand an early downturn in the stock market and still provide an attractive return until it is needed later in life because it has plenty of time to recover. On the emotional side, knowing that your regular retirement income payments are coming from a conservative investment allocation, where a difficult stock market will have minimal impact, provides the peace of mind you need to sleep well at night.