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By Jason Stipp | 03-22-2012 01:00 PM

Getting Your Buckets in a Row

Morningstar's Christine Benz describes several bucket-oriented approaches that investors can adapt for their retirement portfolios.

Jason Stipp: I'm Jason Stipp for Morningstar.

Our director of personal finance, Christine Benz, has often discussed the "bucket approach" for retirement planning on Some readers may wonder how to actually execute this plan. She is here to offer some details around some specific strategies that retirees can take implementing that bucket approach.

Thanks for joining me, Christine.

Christine Benz: Jason, great to be here.

Stipp: So before we get started, let's review the bucket approach to investing. This is something popularized by Harold Evensky. We've talked about it before, but just give us a quick refresher: What does that mean?

Benz: Well, essentially it means, at the most basic level, you are carving out a portion of your total assets before retirement and those are the assets that you will use to cover your near-term living expenses--a lot of people say one to two years' worth of living expenses--that you hold separate from your long-term assets. And the idea is that you're drawing your living expenses there, and you don't have to worry so much about fluctuations in your longer-term assets because you know that your near-term income needs are covered.

What we found in talking to our users is that people find this to be a really helpful concept in constructing their portfolios. The other thing is that they, rather than using a strictly income-centric approach, where they're drawing dividends or income from their bonds, the bucket approach lets them withdraw a stable stream of income. So, you're not buffeted around by what the interest rate environment is like, and that's a particularly important consideration given how low bond yields are right now.

Stipp: If you have that bucket for your immediate living expenses, you can put your mind at rest a little bit knowing that that's covered, and so you can let those longer-term assets fluctuate day-to-day, month-to-month as they might, but knowing that probably over time, they'll work harder for you.

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