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By Jason Stipp | 02-16-2011 05:05 PM

Tips for Asset Location & Allocation in Retirement Accounts

Morningstar's Christine Benz outlines how a bucket approach can guide allocation and rebalancing decisions in retirement, and offers pointers on distributing asset types across various retirement accounts.

Jason Stipp: I am Jason Stipp from Morningstar. It's IRA Improvement Week on, and today we're considering frameworks for thinking about asset allocation and rebalancing in retirement. This can be somewhat of a "sticky wicket" as Morningstar's Christine Benz likes to say. She is here with me today to talk about some general rules of thumb and guidelines for helping you with this.

Thanks for joining me, Christine.

Christine Benz: Jason, great to be here.

Stipp: So as you are accumulating during your working years, it seems somewhat straightforward how to arrange the assets in your retirement accounts. You have more aggressive investments and they progressively get more conservative as you approach retirement, but then you get to retirement, and a lot more complications start to creep into your portfolio plan.

Benz: Absolutely.

Stipp: What's one way to think about and start to get a handle on how you should arrange your allocation once you reach that critical retirement time?

Benz: It's interesting. Jason, when you are in that accumulation mode, the need for asset class diversification is really sort of theoretical. You hold different asset classes to reduce volatility.

When you are in retirement, it really becomes all about "how am I going to liquidate this portfolio as I need my money?" So one concept we've talked about before, and this is one that was pioneered by Harold Evensky, the famed financial planner, revolves around buckets.

So setting up a bucket for your near-term expenses maybe for the next five years or so and that would consist mainly of cash and possibly even high-quality, short-term bonds. And then possibly staging an intermediate-term bucket that holds intermediate- term bonds, maybe even high-quality balanced funds, and that would cover you from maybe years of retirement 6 through 15, say.

And then, finally, thinking about that long-term bucket as maybe something that you would tap in years 16 and beyond of retirement or maybe that's the amount that you are growing for your children, if it turns out that you pass away sometime during those later retirement years.

I think that's a really helpful way of thinking about what goes within each bucket, what types of assets. And to me I think that's a useful way for constructing what goes into a retirement portfolio. Think about when you'll actually need the money.

Stipp: Seems like a very practical way.

Benz: Yes.

Stipp: Then I guess the next question becomes, at some point you are going to use up that first bucket of cash because you will be spending it for your needs. How could you think about how money is going to flow through this bucket process?

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