In light of the recent fiduciary ruling by the Department of Labor, you may be wondering how using a bucket strategy can help you act in your clients’ best interest.
Investment research firm Morningstar defines the bucket approach to retirement planning as a strategy that funds cash-flow needs while the client maintains a diversified portfolio of stocks, bonds and cash. Morningstar offers this helpful video interview with Harold Evensky that further dives into the bucket strategy.
Basically, buckets provide a way for you to ensure that your clients’ short-term income needs are safe from market ups and downs while meeting their long-term growth objectives with market exposure. Buckets provide a way for advisers to create personal plans specific to their clients’ financial goals and needs while helping them understand that plan regardless of their previous financial experience.
Weathering Market Storms
One of the greatest benefits of bucketing is the safety net it casts for when the market inevitably rises and falls. When the market isn’t performing, clients may panic and be inclined to abandon the plan they had previously made for one that will make them feel safe and secure in that moment. Buckets, however, give them a clear picture of their retirement plan down the road. Seeing that they meet their income needs and that their investments will have time to recover from a downturn will help them stick with their bucket plans, which will greatly benefit them down the road.
In addition to bringing peace of mind by providing a visual for their income down the road, buckets provide clients with a steady cash flow in the present. Buckets are a systematic way for a steady income because each year is planned, as opposed to scrambling to liquidate assets so that they have enough money even while the market is struggling. Having that steady, certain income ensures that clients will be able to give great thought to when they sell investments and that ensures that they are selling them at the optimal times. This way, investments are serving at the greatest benefit to bring in the most income.
A Personalized Approach
Bucket strategies can be personalized to each client. Based on their risk profile and financial goals, you and your client can generate strategies with any number of buckets and any lengths of time. The flexibility of buckets even after the plan has been set is an added security because assets and investments can be adjusted, or have time to adjust, while the market weathers its ups and downs.
One of the most traditional methods of retirement income planning, Monte Carlo simulation, does not allow for personalized strategies, and yet, they produce the same rate of returns with the same amount of risk. There is no one-size-fits-all in retirement income planning, and clients forced into such a mold can feel anxious about their funds in retirement. Creating a strategy specific to each client will inspire trust in you and bring them peace of mind knowing that their retirement income plan was created with their unique circumstances and needs in mind.
Seeing is Believing
Bucket strategies can give clients a simple visual. With their personalized strategies, clients will have a better understanding of how their assets and investments will be used during their retirement.
In addition to the simple visual that a bucket strategy offers your clients, buckets create a plan that is easy for clients to understand. They will be able to see exactly where their money is, how it is being invested and how their plan will support them throughout retirement. With this simple, easy-to-understand approach to retirement income planning, clients will be confident in themselves, their finances and, in turn, you.
As your clients approach retirement, it’s important for you to provide them with an income plan that can give them financial security in a volatile market, a simple, understandable approach and a strategy that has been created with their unique needs in mind.
FPA partners with Last Advisor to offer “Bucket Bliss,” a software tool that offers a robust, state-of-the-art financial application designed for advisers to build individual bucket strategies while implementing a comprehensive retirement income plan for their clients. FPA members receive a special rate which can be accessed here.
Editor’s note: A version of this post originally appeared on the Last Advisor blog on August 15, 2016.