By Elizabeth Leary

Kiplinger’s Personal Finance


Bucket 1

4 percent Cash

Bucket 2

20 percent Metropolitan West Total Return Bond M (MWTRX)

16 percent Vanguard Short-Term Investment-Grade (VFSTX)

Bucket 3

25 percent Schwab Total Stock Market Index (SWTSX) or ETF alternative: Vanguard Total Stock Market (VTI)

10 percent T. Rowe Price Dividend Growth (PRDGX)

10 percent Fidelity Real Estate Index (FRXIX) or ETF alternative: Schwab U.S. REIT (SCHH)

5 percent Vanguard Total Intl Stock Index (VGTSX) or ETF alternative: Vanguard Total International Stock (VXUS)

5 percent Vanguard High-Yield Corporate (VWEHX)

5 percent Fidelity New Markets Income (FNMIX)

Ah, retirement. Now you can finally head off into the sunset, enjoying your hard-earned financial security without a care in the world. Alas, not quite.

At this stage of life, you must walk a fine line between the risk of owning too many stocks — or too few.

Using a bucket system is one way to balance both risks. Here’s how it works: Hold one year’s worth of expenses in cash. That’s your first bucket. Hold enough money in your second bucket to cover your expenses for the next nine years, and invest this in high-quality bonds or a fixed annuity (our model portfolio assumes you are withdrawing 4 percent per year, meaning this bucket accounts for 36 percent of your portfolio). Your third bucket may be invested in stocks and other aggressive options. If a bear market roars, you can sleep easy knowing that you don’t need to touch your stock holdings for a decade — when you will have to replenish your bucket number two.

In a high-interest-rate world, you could hold a conservative portfolio of bonds and live comfortably off coupon payments. But that’s not the case today. Avoid the temptation to load up on junk bonds and stocks with superhigh yields to boost your portfolio’s payout to 4 percent. Rather, you need a mix of investment types to provide both income and capital appreciation.

The second bucket in our model portfolio holds two conservative bond funds instead of higher-yielding options because that’s the money that lets you sleep at night. Riskier income investments, including small allocations to REITs, junk bonds and emerging-markets debt, are sequestered in the third bucket. The third bucket also houses a 30-percent allocation to broad stock index funds, so you’ll always capture the market’s growth.

Replenish your buckets periodically by selling top performers in your third bucket and by selling bond-fund shares as necessary to refill the cash bucket.

If the market tanks, hold off on touching your stock funds until they recover, even if doing so means you draw down your second bucket for a few years to pay for living expenses