The Why and How of Bucketing

The bucket approach to retirement planning is straightforward and makes intuitive sense. The basic idea is that a retiree holds a cash component alongside a well-diversified, long-term portfolio consisting of different asset classes. 

Knowing that money for near-term spending needs (one to two years' worth of living expenses) is parked in cash, helps the retiree cope with the fluctuations that will inevitably accompany the stock/bond portfolio. Another big advantage of bucketing is that it's flexible. It can incorporate many of a retiree or pre-retiree's existing holdings and a bucket plan can be readily customized to suit a retiree's own specifications

Bucket Portfolio

Anticipated Time Horizon: 25 or more years
The below funds are examples of bucket

Bucket 1: Years 1-2

13%: Stanlib Money Market (cash)
This portion of the portfolio is here to supply living expenses on an ongoing basis. As such, we're not taking any chances with it but instead parking it in true cash instruments. The specific percentage of the portfolio that bucket 1 consumes will depend on both the retiree's portfolio size as well as his or her spending rate. 

For example, a retiree with a R15,000,000 portfolio who's spending R1,000,000 a year would park roughly 13% of his or her portfolio in bucket one (R1,000,000 times two, divided by R15,000,000). The retiree spends out of bucket 1, then refills it as it becomes depleted.

Bucket 2: Years 3-10

10% Stanlib Balanced Cautious
8% Allan Gray Balanced
12% Prudential Inflation Plus
7% Prescient Income Provider

Whereas bucket 1 is all about safety and liquidity, bucket 2 steps out a bit on the risk spectrum. The aim is to deliver a bit more income than bucket 1, and possibly some growth, too, but without excessive volatility. As with the other portfolios, I've organized this portfolio by risk level. These portfolios will likely have limited volatility, so it can serve as next-line reserves in case bucket 1 is depleted and the combination of income distributions and re-balancing proceeds is insufficient to refill bucket 1. The above equates to roughly R5,500,000 (37% of the portfolio)

Bucket 3: Years 11 and Beyond

10% Investec Opportunity Fund
10% Foord Equity
10% Marriot Dividend Growth
10% Stanlib Global Property
10% Stanlib Property Income

The growth engine of the portfolio, bucket 3 is dominated by more aggressive funds. As this component of the portfolio will remain untouched for the next decade, the assets here are primarily invested in equities. This portion of the portfolio also includes a fairly high stake in foreign stocks, which have the potential to add to the portfolio's volatility level in part because of currency fluctuations. The above equates to roughly R7,500,000 (50% of the portfolio).