Develop a smart retirement asset allocation strategy to set yourself up for a comfortable retirement.

Designing a Retirement Asset Allocation Strategy Part III

How to Focus on Growth and Fill Your Third Bucket

The following article on retirement asset allocation strategy features content adapted from the book Momma’s Secret Recipe for Retirement Success by Dan Ahmad, Jim Files, and Jack Canfield. Get your copy here!

At Peak Financial Freedom Group, we talk a lot about retirement asset allocation strategy, and that’s because we want to encourage you to get serious about your retirement security. We believe strongly in a comprehensive, written retirement income plan to tie everything about your money together, which we recommend doing with what we call the “3 Bucket Safe Money Approach.” If you’ve been reading our blog for a while now, you’ve seen articles about Bucket #1 and Bucket #2, where you allocate assets to retirement income and liquidity. Now, we’re going to discuss the importance of Bucket #3 in your retirement asset allocation strategy.

Retirement Asset Allocation: Bucket #3 is All About GROWTH

When you’ve already used our suggested retirement asset allocation strategy to fill your first two buckets, it’s time to focus on setting yourself up for growth. For Bucket #3, we want to create the opportunity for potential growth, but we do not want to take excessive risks. We want to invest in the stock market for the opportunity for positive returns, but we don’t want to subject assets to -50% or higher losses like what happened during the Technology Bubble between 2000 through 2002 and the Financial Crisis between 2007 through 2009.

In our retirement asset allocation strategy, Bucket #1 provides “certain income” that is guaranteed for as long as you live, while Bucket #3 provides “maybe income” that is not guaranteed. This means that Bucket #3 must be managed for volatility and loss reduction. Bucket #3 should generally be liquid and available in a lump sum.

First of all, the assets you place in Bucket #3 cannot, and will not, be “naked in the stock market,” you will not “ride out all losses,” and you will not “subject these assets to unlimited risks.” In your ideal retirement asset allocation strategy, Bucket #3 may invest in stocks and low-cost exchange-traded funds (ETFs) or index funds, be managed professionally at a reasonable total fully-disclosed cost, focus on stopping large stock market losses, employ a “stop-loss” and/or other risk mitigation strategy, and be system driven and not affected by your emotions. There will be various fees associated with this type of retirement asset allocation and management strategy. Make sure to get all fees disclosed to you in writing.

SEE ALSO: Do You Know the Two Stages of Money in Retirement?


Why Use a Stop-Loss Strategy for Retirement Asset Allocation?

Many people ask why we would use a “stop-loss” strategy because they heard you can’t time the market. It’s 100% correct that you can’t time the market. A stop-loss strategy does not time the market, it simply removes those assets from the stock market after the stock market shows a downward trend and suffers a specific loss. There is no market timing whatsoever, just a pre-determined, preset, level of loss acceptance, to avoid “riding the market down to the bottom.” As you’ve read many times from us, now that you are retired, do you really want to continue to do the same things you’ve been doing, continue to heed your previous advice and “stay the course,” “ride out all market losses,” and “focus on the long term?” If you do this, you may continue to risk your retirement security by subjecting your assets to potentially large losses through potentially less-than-ideal retirement asset allocation decisions.

As an example, after suffering a -10% stock market loss, most retirees believe there is less risk in the stock market after the loss because they think there isn’t as much the stock market can go down after the loss. Think of this like a metal spring. If you push a spring down, it goes down far easier at the top than after it has been compressed a certain amount.

While this “compression phenomenon” is true with a metal spring, it is not accurate or applicable pertaining to the stock market, it is just the opposite. Analysis has shown that once the stock market drops -10%, there is a strong probability the stock market will continue to go down at that point. If you have a greater than 50% chance you are going to lose money at any point in time, what should you do, leave your money in that investment? You may want to at least consider getting it out of that investment at that time. This type of platform has the goal of reducing the risk, the potential for loss, of the stock market.  This means you can still suffer a loss, but the goal is for the loss to be reduced by using a savvy retirement asset allocation strategy.

Creating ‘Competitive’ Growth Rates for Your Portfolio

In the retirement asset allocation strategy we’re suggesting, Bucket #3 has the goal of providing the opportunity for competitive growth rates from an asset that has less risk than the stock market. For Bucket #3, what does “competitive” mean? It means you may earn less than the stock market because you are taking potentially less risk.

These potential return goals are far short of the +19% the stock market earned, and there is no guarantee you will earn anything at all in this type of strategy. We believe, in retirement, the most prudent strategy is often to accept a lower potential rate of return with a significantly lower projected risk.

SEE ALSO: Annuities 101: A Primer on a Polarizing Term

Retirement Asset Allocation: Your Comprehensive Bucket Strategy

Bucket #1, Bucket #2, and Bucket #3 make up the conservative portion of your retirement asset allocation plan:

  • Bucket #1, the guaranteed lifetime income bucket, is designed to provide complete principal protection against all stock market losses, provides you income guaranteed for life, offers the potential for competitive rates of return, and eliminates your fear of running out of money.
  • Bucket #2, the liquidity and safety bucket, is designed to provide you complete principal protection against all stock market losses, full liquidity to your funds for any purpose, and the freedom to spend your money.
  • Bucket #3, the growth bucket for retirement asset allocation, is designed to provide you with liquidity of all funds, the potential opportunity for growth, and potential risk reduction as compared to the overall stock market.

As you can see, the three buckets can be used to create a powerful retirement asset allocation plan.

How We Can Help with Your Retirement Asset Allocation Strategy

At Peak, we specialize in working with these conservative retirement asset allocation strategies. We’d like to help you worry less, enhance your retirement income security, and enjoy this phase of life you worked so hard to achieve. Please call us today to schedule a conversation.

Peak Financial Freedom Group
2520 Douglas Boulevard, Suite 110
Roseville, CA 95661


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