Today, the average 55-year-old Canadian can expect to live to the age of 84, a gain of 24.6 years since 1926. While a good reason to celebrate, it also means that Canadians are now spending nearly as much time in retirement as they do in their working lives. This poses a challenge for retirees who need to ensure their retirement savings last.

 

What is a bucket portfolio?

 

“Bucketing” means dividing a portfolio into three main investment time horizons: a long-term bucket, a medium-term bucket and a short-term bucket. The goal is to insulate the long-term bucket from near-term cash flow needs, allowing the equity portion of the portfolio to remain invested longer and grow over time. Annual retirement income is drawn from the short-term bucket, which holds several years in reserve and is topped up from the medium-term bucket. The top-up process is tailored to the investor’s unique circumstances and general market conditions.

 

How it works

 

The size and holdings of each bucket are determined by your initial wealth and income requirements, as well as your risk tolerance and return objectives.

 

Short-term – Income (1-5 years)

 

The short-term bucket holds cash and short-term investments for income withdrawals and emergency funds. It also helps to reduce the impact of short-term market volatility on the portfolio.

 

Medium-term – Buffer (6-10 years)

 

Holds income-generating investments, including low risk, low volatility equities for stable capital gains. This bucket serves as a buffer between the cash bucket and the long-term growth bucket.

 

Long-term – Growth (10+ years)

 

Holds growth-oriented equity funds, which are more volatile but offer higher potential for capital growth to sustain the portfolio for the later years of retirement.

 

Why the long-term bucket matters

 

The long-term bucket increases the lifespan of your retirement portfolio, helping maximize the time that a portion of your portfolio remains invested in growth-oriented securities. Since cash withdrawals are taken from your short –term bucket, your equity securities can be left to grow for a longer period. This can be especially important if the stock markets experience negative returns in the early years of your retirement.