Barron's on Retirees' Cash Buckets
Barron's writes, "Retirees, It's Time to Give Yourself a Raise," which says, "If you're going it alone, consider putting your portfolio into buckets, a strategy popularized by Morningstar and credited to financial planner Harold Evensky. The approach can accommodate withdrawal rates like 4% or 5%, and it's useful to tailor your portfolio to your specific spending and long-term growth needs. The idea is to divide your portfolio into three buckets: one holding cash for near-term expenses, a second in fixed income and high-yielding equities to handle intermediate expenses, and a third in growth stocks to help your portfolio beat inflation and possibly keep growing." They explain, "Your cash bucket is like your Fort Knox -- it's solid, no matter what the market does. Sitting on cash isn't bad now, with yields of 4% to 5%, but this is an all-weather strategy to employ even after yields fall. You don't want to be left vulnerable in a year like 2022, when both stocks and bonds fell by more than 10%. If that happens again and you don't have a cash cushion, you’d be forced to withdraw money from a declining portfolio to pay the bills, locking in your losses and hastening the depletion of your savings. Your cash bucket should hold enough money to help cover up to two years of expenses: budget items like housing, food, and transportation. It might hold vehicles like FDIC-insured certificates of deposit, high-yield savings accounts, and money market mutual funds from companies like Vanguard, Charles Schwab, and Fidelity." Barron's says, "This bucket doesn't hold one to two years of your overall expenses -- just what you need from your portfolio. Add up your annual spending and then subtract the amount you'll receive from Social Security and other income, such as rental properties or a pension. Factor in taxes. Whatever is left over would come from the cash bucket.... Once your cash needs are set, move on to the second bucket. This should hold five to eight years' worth of your required portfolio income. It should hold things like high-quality bonds and stocks that pay relatively high yields, such as utilities; real estate investment trusts, or REITs; and midstream energy companies. Bonds are at a pivot point, with the Federal Reserve expected to start an interest-rate cutting cycle in September. The yield curve, measuring the difference between short- and long-term rates, looks close to un-inverting, finally pushing up the long end over the short. That poses reinvestment risk for bonds maturing in a year or two; when they come due, market yields could be much lower."
