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By Christine Benz | 06-14-2013 10:00 AM

A Bucket Approach in Practice

Financial planner Roger Wohlner describes his bucketing strategy for clients' near-, intermediate-, and long-term needs.

Christine Benz: I'm Christine Benz for Morningstar.com.

The bucket approach to retirement planning is an increasingly popular strategy. Joining me to discuss it is Roger Wohlner; he is a financial planner at Asset Strategy Consultants in Arlington Heights, Ill.

Roger, thank you so much for being here.

Roger Wohlner: Well, thank you, Christine.

Benz: Roger, you actually use the bucket strategy, or version of it, when working with clients. I'd like to talk about how you segment the buckets. So, let's start with that first bucket number one, the cash bucket. Yields are really low right now. So, there is a risk of having too much in terms of living expenses in that bucket number one, but how do you work with clients on what goes in there and how big it should be?

Wohlner: That's a great question, and there is no single answer. It's a client-by-client type of situation. And when we say "bucketing," I used it in the context of what total asset allocation approach for their portfolio. But typically, the cash bucket or the real low-risk bucket, which could also be things like short-term bonds or that type of thing, that's a lot driven by a combination of how much money the client has, what their income needs are, and what they need to sleep at night.

So, it might be one year or might be two years, three years, but what I like to set up for most clients in retirement is, no matter what the market is going to do, even a 2008-2009 scenario, you're going to have this layer of cash or very, very low-risk investments, where you can draw on that versus having to sell into a down market--and that I think is a key thing.

So, again, it's a combination of factors, but I think it's very important to a lot of clients, because it gives them the confidence then to say, you also have these longevity needs, and inflation even at its current benign levels will erode your spending power in 20-25 years. So that gives them the confidence so we can then go to the other bucket and say, here is your stock portion, here is your medium-risk portion, which may be dividend-type stocks or may be bonds, or … alternative type of funds. So, that's really how I use the bucket approach in retirement.

Benz: Let's move on to that second piece; you alluded to it being the intermediate piece of the portfolio. Let's talk about what is going into that bucket number two at this juncture, particularly given how low bond yields are, the prospect of rising interest rates. What are you telling clients to use as their next-line reserves, once they've exhausted that bucket number one?

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