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The Right Strategy Can Help You Navigate Volatile Times
Market volatility and economic uncertainty have left many retirees wondering if they should stick with their retirement plans through what might be a long rebound or sell investments now. If that sounds familiar, you’re not alone.
As you navigate potential changes to your financial plans, it’s helpful to consider how your emotions can influence your decisions. This way, you can focus on a strategy that will help you achieve and maintain the retirement you want—whatever the market is doing.
During times of economic uncertainty, it’s common to let hypothetical ‘worst case’ future scenarios drive decisions. Unfortunately, these assumptions can result in choosing to reduce short-term losses at the expense of potential long-term gains once the economy recovers.
One way to take emotion out of investing is to use a strategy called bucketing, which can help protect your investments from current market fluctuations and also help grow your wealth long-term to ensure your portfolio is self-sustaining.
How the Bucketing Strategy Works
Bucketing involves structuring your portfolio and dividing your investments into three main time horizons or buckets. This helps to protect your near-term cash flow while allowing other portions of your portfolio to stay invested and grow.
Short-Term or Cash Bucket
This bucket holds savings, cash-like and short-term investments such as GICs and money market funds that mature in 1-5 years. It’s designed to provide the income required to meet your immediate basic expenses once you retire and to help protect you from market fluctuations.
Medium-Term Bucket
This bucket acts as a buffer between the short-term and long-term buckets. This is where you hold income-generating investments that mature in 6-10 years. You can draw from the medium-term bucket to top up the short-term bucket or to manage the unexpected.
Long-Term Bucket
This bucket holds potentially high-risk investments, such as growth equities that mature in 10+ years and help sustain your portfolio. This time horizon may cover more than a full economic cycle, giving your portfolio time to recover from any down markets or economic contractions.
Getting Started with Bucketing
The overall plan and the decisions about what types of investments to hold within each bucket are based on your income needs, life expectancy, risk tolerance and what your goals are in retirement.
A common misconception is that once retired, people don't save up for things, but that's not true. You may want to travel or renovate your home. Building goals into your plan can help make sure you have the money to make it happen.
Here are a few key questions to help you build the bucketing strategy that works for you:
Looking at the income sources available to you, such as Canada Pension Plan (CPP), Old Age Security (OAS) and your company pension, consider how much annual income you will need.
This will vary depending on your lifestyle and will change over the course of your retirement. For example, someone planning to travel during the first five years of retirement will have different income needs than someone planning to stay home and spend time with family.
A good plan also has contingencies, such as a home repair fund and emergency fund for unexpected challenges. Planning for those just-in-case scenarios puts a buffer in place to protect the income you need to meet your cash flow needs.
Revisit the bucketing strategy regularly to ensure it considers any changes that have occurred in your life, goals and the broader markets and economy. There are areas that may need to be rebalanced throughout retirement. Sitting down annually with an RBC Financial Planner for a financial checkup will help ensure your plan is delivering what you need.
If, like many retirees, you’re worried about unpredictability in the markets, employing a bucketing strategy can help. An advisor can help to develop a bucketing strategy that provides the confidence to see you through any storm.
What to Check Out Next
How to Create a Steady Income in Retirement
How Much Do I Need to Retire?
Calculate Your Retirement Cash Flow
Let’s Start the Conversation
Financial planning services and investment advice are provided by Royal Mutual Funds Inc. (RMFI). RMFI, RBC Global Asset Management Inc., Royal Bank of Canada, Royal Trust Corporation of Canada and The Royal Trust Company are separate corporate entities which are affiliated. RMFI is licensed as a financial services firm in the province of Quebec.
The content of this publication is provided for informational purposes only and is not intended to provide specific financial, investment, tax, legal, accounting or other advice for you, and should not be relied upon in that regard. All charts, illustrations, examples, case studies and other demonstrative content are general and have been provided in this publication for illustrative purposes only. The case studies included do not represent actual events or real individuals. While efforts are made to ensure the accuracy and completeness of the information at the time of publication, errors and omissions may occur. Readers should consult their own professional advisors when planning to implement a strategy. This will ensure that individual circumstances have been considered properly and that action is taken on the latest available information. Interest rates, market conditions, tax and legal rules and other investment factors are subject to change.
The content of this publication is provided for informational purposes only and is not intended to provide specific financial, investment, tax, legal, accounting or other advice for you, and should not be relied upon in that regard. All charts, illustrations, examples, case studies and other demonstrative content are general and have been provided in this publication for illustrative purposes only. The case studies included do not represent actual events or real individuals. While efforts are made to ensure the accuracy and completeness of the information at the time of publication, errors and omissions may occur. Readers should consult their own professional advisors when planning to implement a strategy. This will ensure that individual circumstances have been considered properly and that action is taken on the latest available information. Interest rates, market conditions, tax and legal rules and other investment factors are subject to change.