RISK, DISTRIBUTIONS, AND CASH FLOW
Utilization of Assets. As retirement nears, people need to transition from a philosophy of asset accumulation to a strategy for using assets to provide a stream of income that matches their living expenses. To help visualize this think in terms of “buckets of assets.” First Bucket | 1-3 Years of Distributions. Short-term/immediate needs bucket. This is often the most overlooked, yet critical bucket! The purpose is to accommodate several years of distributions—ideally up to 3 years. Investments should be risk-free because principal protection is more important than return! Investments may include money market, short-term CDs and U.S. Government Bonds (e.g. T-Bills). Second Bucket | 3-7 Year Time Horizon. Intermediate bucket. The primary purpose of this bucket is to generate income (e.g. interest or rent) and preserve capital. Careful consideration should be given as to how much risk you are willing to take with this bucket of assets. Investment time horizon for this bucket is typically 3-7 years. Typically investments include CDs, investment grade bonds, and income producing real estate such as farm land, commercial real estate, etc. As interest and rental income are earned, it may be used to fill Bucket 1. Third Bucket | 7+ Years. Long-term bucket. This bucket is your hedge against inflation. A longer time horizon is needed to ride out economic and financial market volatility. This bucket typically is invested in a diversified stock portfolio and may include long-term real estate holdings such as farm land or commercial real estate. Remember to harvest your gains! Have a plan in place to trim and rebalance as market conditions permit. Dividends, rent, and appreciation of the assets may be used to increase Bucket 1 or Bucket 2.
8
Made with FlippingBook - Online catalogs