What is Strategic Asset Allocation?
The bucketing approach to strategic asset allocation began with a Harry Markowitz paper in the Journal of Finance in 1952. It outlined how investors could allocate assets for the highest return with a given level of risk. This would later earn Markowitz a Nobel Memorial Prize in Economic Sciences and redefine how financial advisors optimized investments for their clients.
We’ve come a long way since Markowitz’s early work. Strategic asset allocation has proven to be more valuable than ever. There are plenty of sophisticated measures to craft strategic asset allocation plans, you can illustrate how the client should dispense uncorrelated assets into three segments: liquid funds, conservative investments, and growth assets. Or as we like to call them—the Now, Soon, and Later Buckets.
Many financial advisors rely on complex charts, graphs, and statistical analyses, making it challenging for clients to understand their investment strategy. One of the most effective ways to simplify asset allocation for clients is through The Bucket Plan.
The end goal is for the client to fully understand the process and feel confident as they move forward with your recommendations.
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Strategic Asset Allocation with The Bucket Plan®
The bucketing approach to retirement investing started to work its way into the financial lexicon in the 1980s. Financial planner, Harold Evensky, developed this strategy to combat the challenge of low-interest rates. The resulting investments didn’t provide enough income for retirees, forcing them to delay retirement, reduce their standard of living, or take too many risks with their capital.
The bucketing concept gained momentum during the 1990s and picked up steam with the dawn of the information age. By the time the recession hit in 2008, the Later Bucket had become a haven for investments to ride out the ups and downs of the market without affecting the immediate income that was being withdrawn from the Now Bucket and reloaded from the Soon Bucket.
Having long-term goals for the Later Bucket helps protect retirees from making rash decisions during market fluctuations and taking deductions on their investments by cashing in during a downturn.
Over time, we have adapted The Bucket Plan® to facilitate:
- Retirement income planning
- Provide a viable strategic asset allocation plan for clients in any demographic
- Provide peace of mind for your clients
Financial planning is a complex process, but The Bucket Plan Philosophy provides a simple, effective way for you to explain, and more importantly, for your clients to understand, the plan you developed for them.
The key to strategic asset allocation is positioning and protecting a mutually agreed-upon portion of your client’s assets to buy a time horizon that allows them to invest the remainder for long-term growth. This structure will provide a reliable income source throughout their retirement.
Breakdown of the Now, Soon, and Later Buckets
Now Bucket
A fully funded Now Bucket will give your client a sense of security. This prevents them from having to cash in investments when they need money, which leaves them vulnerable to losses when the market is down, unforeseen taxes, and unexpected penalties. Although there will be little return on these funds, it’s a small price to pay for your client’s peace of mind.
The Now Bucket is safe and liquid money the client can access whenever needed. The amount varies by individual. All parties involved should agree on the amount that makes them feel comfortable. There should be enough for everyday needs and emergencies, but not so much that they miss out on growth opportunities.
Soon Bucket
The Soon Bucket is for conservative investments or income for the first phase of retirement. It is set up for growth to offset inflation but invested conservatively to negate the effects of a major market correction.
It also serves as an inflationary hedge, giving your client an extra cushion as the cost of goods and services rises. For clients with a longer time horizon before retirement, it might serve as their opportunity bucket. If a good investment opportunity arises, but the stock market is down, they will still have the funds available.
There are three primary ways of structuring income from the Soon Bucket:
1. The Bridge Approach
You fund reliable income for a specific period using the minimal assets required to construct the bridge.
- An example might be a 10-year bond or CD ladder
- A period-certain annuity
- An indexed annuity with penalty-free withdrawal provisions
- A conservative investment portfolio in which you will be consuming both principal and interest.
2. Lifetime Income
You fund an annuity to provide lifetime guaranteed income. This can be done through a SPIA, DIA, FIA, or variable annuity.
If the annuity payment is going to begin within ten years, we would consider that a Soon Bucket asset. If deferral will be 10+ years, we would generally place that asset in the Later Bucket.
3. Portfolio Yield
Some high net-worth clients are fortunate enough never to tap into principal for supplemental retirement income and can live off the dividends, interest, or yield produced by their investment portfolio.
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Later Bucket
The Later Bucket is dedicated to long-term investments and legacy planning, helping clients build wealth while ensuring financial security for their heirs. This bucket allows funds to remain invested longer, increasing the chances of higher returns over time.
Legacy planning is not just about leaving money to the children; it protects the surviving spouse. When one spouse dies, the household income usually goes down, while many expenses stay the same, and taxes often increase.
[Related Reading: How Asset-Based long-Term Care Helps Protect Dependents]
Implementing The Bucket Plan® in Your Financial Planning Strategy
The strategic asset allocation approach of The Bucket Plan® empowers financial professionals to create holistic financial plans that provide stability and growth opportunities for their clients.
By structuring assets into the Now, Soon, and Later Buckets, advisors can ensure clients have a reliable income stream throughout their retirement while optimizing their portfolio’s performance.
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Want to integrate The Bucket Plan® into your wealth management strategy? Get in touch and we’ll guide you on how this approach can enhance your holistic financial planning process.
Financial Professional Use Only
The information provided in this presentation is not intended as investment advice or legal advice. The information provided is for informational and training purposes only. The information in this presentation was accurate as of the time the material was created. Tax laws and rulings can frequently change. Please discuss the client’s current situation with an accountant or tax advisor.