Segmenting Your Assets

A liability-driven approach to investing for retirement income

The Bucket Strategy® generally consists of three buckets, across five bucket categories, ranging from conservative to aggressive. It serves as a framework to help you make decisions regarding the unique challenges of the withdrawal, or decumulation, phase of retirement. The Bucket Strategy® then helps you to match your assets to your liabilities (or income needs) in retirement, aiming to give a purpose to every dollar in your portfolio and operating similarly to how endowments and pension plans manage their portfolios.

The Bucket Strategy

You’ve got financial liabilities—we all do. Some, like your mortgage, your day-to-day living expenses, and other recurring bills, need to be taken care of immediately. These are short-term liabilities. Others are more long-term in nature: a young child’s college education, a legacy for your heirs, or even the daily living expenses you’ll need twenty years from now.

How should these liabilities be funded? And where does the money to fund these liabilities come from? The Bucket Strategy® aims to address these questions with its liability-driven approach.

In its most basic form, The Bucket Strategy® divides your portfolio’s assets into different segments—called buckets—each with its own time horizon, risk tolerance, and investment objective.

 

If you have bills that must be paid in the short term, that money should come from a source that is independent from, and less affected by, volatile movements in the stock market. The rate of return is typically low, but the money potentially has a better chance of being there when you need it.

Other liabilities, such as those that you won’t need to fund for several years, can be funded with longer-term assets that can withstand a little more risk (thus allowing you a potentially better rate of return).

As your short-term bucket depletes, it is designed to periodically be refilled by one of the longer-term buckets—and this process is designed to repeat itself.

 

The whole idea is to match your assets with your liabilities so that you’re not forced to rely on riskier, longer-term assets to fund your spending needs today.

We can’t control the movements of the stock market, and we don’t want market movements to control how much money you have available to spend. By keeping your short-term liabilities financed with short-term assets, The Bucket Strategy® aims to deliver predictable withdrawals from your portfolio to potentially meet your retirement income needs.

Understanding the Strategy

Your Bucket Strategy is unique to your personal situation

Your personalized Bucket Strategy is generated based on a financial questionnaire completed by you, the client, and is specific to your personal situation. The financial profile information from this questionnaire is used to design your portfolio based on retirement and bucket assumptions. Retirement assumptions include determining whether to design the portfolio based on withdrawal rate (a percentage of the portfolio value at retirement) or based on total potential income from all sources as well as taking into account a portfolio withdrawal strategy designed to meet your total income needs (including portfolio withdrawals and other income, such as retirement income, pensions, and rental income).

This bucket category provides investors with guaranteed income for life and is generally suitable for conservative investors who believe they have a long life expectancy. Potential investment solutions are life annuities and variable annuities with guaranteed withdrawal/income benefit features.

 

The Fixed Income bucket is designed to spend down over five to seven years, thus “buying time” for the Balanced bucket to potentially grow. This category is typically invested in non-volatile (sometimes guaranteed) investments, including money markets, CDs, short-term debt securities, and fixed annuities.

The Balanced bucket is the bridge between your Fixed Income and Long-Term Growth buckets. This bucket is designed to replenish the Fixed Income bucket, resulting in additional time for your long-term investments to potentially grow. Suitable investment options include laddered bonds, balanced portfolios, fixed and indexed annuities, structured products, UITs, and closed-end funds.

The Long-Term Growth bucket is designed for 15 to 25 years of growth. As your other buckets are designed to buy you time, this bucket is designed to grow untouched for near-term income. Therefore, we generally allocate this category to equities such as domestic and international stocks, commodities, currencies, and alternative investments.

 

The Alternatives bucket is designed to provide both growth and income for the portfolio over the long term. Income generated from this bucket may be used to supplement income required from the Fixed Income bucket. Dividend-paying investments (such as non-traded REITs and other high-yield investments) are appropriate for this category.

Reporting and Progress

The Bucket Strategy® Wealth Analysis

The Bucket Strategy® Wealth Analysis is our comprehensive report that provides you with a look at where you stand currently and where a financial plan may lead you.

As you begin the planning process, it’s helpful to have a snapshot of where you are today. The Bucket Strategy® Wealth Analysis starts with your current assets then provides you with a hypothetical cash flow projection over the following 15 years within the framework of a Bucket Strategy plan.

In conjunction with the cash flow projection, the analysis also includes a proposed account allocation to the various bucket categories that shows you where specific dollar amounts are allocated among the Lifetime Income, Fixed Income, Balanced, Long-Term Growth, and Alternatives buckets, where appropriate.

Tracking Progress

The Bucket Strategy® Progress Report

You’ll recall from your school days how a midterm report would allow you to see how you were doing and which areas (if any) needed extra attention.

Our Bucket Strategy Progress Report provides periodic updates to you so that you’re able to see at a glance how your accounts are doing. We include summaries of your Bucket Strategy plan and household accounts, along with a comparison of account values across each allocation in the individual buckets. This report will analyze where you might be above, below, or right on the targets that were set up during your initial strategy session.

The purpose here is to find out where adjustments might need to be made and to keep you on track so that you never lose sight of your goals.

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Bringing It Together

A consolidated position report

Your consolidated position report will provide you with a current household allocation summary and, for comparison, a summary of your allocation 12 months prior. In this report you’ll also see consolidated portfolio detail, where you’ll find the asset class, units, price, value, and portfolio composition information for each bucket.

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Understanding The Bucket Strategy® Categories and Strategies

  • Alternative Investments

    Investing in alternative investments is speculative, not suitable for all investors, and intended for experienced and sophisticated investors who are willing to bear the high economic risks of the investment, which can include the following: loss of entire investment, loss of substantial portions of investment, lack of liquidity, volatility of returns, restrictions on transfer, lack of diversification and higher risk due to concentration, absence of pricing or valuation, delays in tax reporting, higher fees and less regulation than other investments, and unproven or inexperienced managers. Investors must be provided with and should carefully read the related Offering Memorandum, offering documents, or prospectus, which will contain the information needed to evaluate the potential investment and provide important disclosures regarding risks, fees, and expenses. Investments may not be available in all jurisdictions, and no offer, solicitation, or sale is authorized if it is unlawful to make such offer, solicitation, or sale.

  • Certificates of Deposit (CDs)

    CDs are FDIC insured up to $250,000 and offer a fixed rate of return. They do not necessarily protect against a rising cost of living. Penalties may be incurred for early withdrawals. FDIC insurance on CDs applies in the case of bank insolvency but does not protect market values.

  • Closed-End Funds

    Investing in closed-end funds involves risks and varies from fund to fund based on the underlying investments. These risks include market fluctuation, valuation, interest rate, credit, and concentration risks. Based on these risk factors and others, not every fund may be suitable for all investors. Investors may be subject to alternative minimum tax (AMT), and actively managed portfolios may have fluctuating dividends.

  • Commodities

    Commodities trading is not suitable for all investors and may result in a loss of some of, all of, or more than the amount originally invested. The risk of loss in trading can be substantial. Before trading, investors should read the Risk Disclosure Statement and understand the potential risks.

  • Corporate Debt Securities

    The principal value of corporate debt securities (corporate bonds) will fluctuate with changes in market conditions. If sold prior to maturity, bonds may be worth more or less than their original cost. Various bond structures are available in the market, and not all offerings may be suitable for every investor.

  • Equity-Indexed Annuities

    Equity-indexed annuities (ETAs) are long-term investments and can be complex. EIAs generally offer a minimum guaranteed interest rate (fixed sub-account) combined with an interest rate linked to a market index (index sub-account). Index-linked gains depend on the combination of indexing features that an EIA uses. You should refer to the consumer brochure for a complete description of the features of the EIA you are considering. Any guarantees of fixed annuity contracts are contingent on the claims-paying ability of the issuing insurance company. Annuity withdrawals are taxed as ordinary income and may be subject to surrender charges plus a 10% federal income tax penalty if made prior to age 59 ½ . Surrender charges may also apply during the policy’s early years.

  • Exchange-Traded Funds

    Exchange-traded funds (ETFs) are subject to risks similar to those of stocks. Investment returns will fluctuate and are subject to market volatility so that an investor’s shares when redeemed may be worth more or less than their original costs. Investments in smaller companies typically exhibit higher volatility. In addition to the normal risks associated with investing, narrowly focused investments typically exhibit higher volatility.

    An investor should carefully consider investment objectives, risks, charges, and expenses before investing in an exchange-traded fund. This information and more complete information, including potential risks, is included in each exchange-traded fund prospectus, which can be obtained from your financial advisor.

  • Fixed Deferred Annuities

    Any guarantees of fixed annuity contracts are contingent on the claims-paying ability of the issuing insurance company. Annuity withdrawals are taxed as ordinary income and may be subject to surrender charges plus a 10% federal income tax penalty if made prior to age 59 ½. Surrender charges may also apply during the policy’s early years.

  • Government Debt Securities

    Government debt securities (government bonds) are issued and guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. U.S. government bonds are guaranteed as to the timely payment of principal and interest; however, these securities are subject to market risk if sold prior to maturity.

  • Managed Accounts

    Investors should bear in mind that fee-based accounts through Lucia Capital Group, when compared with commission-based accounts, often result in lower costs during periods when trading activity is heavier, such as the year an account is established. However, during periods when trading activity is lower, such arrangements may result in a higher annual cost for transactions. Thus, depending on a number of factors, the total cost for transactions under a fee account versus a commission account can vary significantly. Some such factors are account size, amount of turnover, type and quantity of securities purchased or sold, commission rates, and the client’s tax situation.

  • Money Market Funds

    Money market funds are neither insured nor guaranteed by the FDIC or any other government agency. Although money market funds seek to preserve the value of your investment at $1 per share, it is possible to lose money by investing in a money market fund.

  • Municipal Debt Securities

    The principal value of municipal debt securities (municipal bonds) will fluctuate with changes in market conditions. If sold prior to maturity, the bonds may be worth more or less than their original cost. Investments in municipal debt securities may not be appropriate for all investors, particularly those who do not stand to benefit from the tax status of the investment.

  • Mutual Funds

    Investing in mutual funds involves risk, including loss of principal; as such, your shares may be worth more or less than their original value at redemption.

    An investor should carefully consider investment objectives, risks, charges, and expenses before investing. This and other and important information, including potential risks, is included in the prospectus, which can be obtained from your financial advisor.

  • Non-Traded REITs

    Investments in non-exchange-traded REITs involve risks. These risks include, but are not limited to, the following: the absence of a public market for these securities; the possibility of substantial delay in making distributions; payment of significant fees to affiliated sponsors, advisors, and general partners; and uncertainty as to whether the stated objectives will be met. Special risks are associated with investing in real estate, such as the possibility of declining real estate values, the possible lack of availability of mortgage funds, changes in interest rates, the possibility of declining economic conditions, overbuilding, and extended vacancies of properties.

    Please contact your financial advisor to receive a prospectus, which includes information on charges, expenses, and other important facts. Investors should consider their investment objectives and risks along with an offering’s charges and expenses before investing. Please read the prospectus carefully before investing or sending money.

  • Single Premium Immediate Annuities

    With a single premium immediate annuity, you pay a single premium to a life insurance company that guarantees you a stream of payments over time. These payments are determined both by U.S. Treasury interest rates when your contract is issued and by choices you make from a variety of payment options. Premium payments are guaranteed by the issuer and its claims-paying ability.

  • Structured Products

    Structured investments may not be suitable for all investors. These are generally highly complex investments with high risk. Full disclosure of risk factors for each product is available through term sheets, prospectuses, or other offering documents.

  • Unit Investment Trusts (UITs)

    An investment in any unmanaged UIT should be made with an understanding of the risks involved with owning common stocks, such as an economic recession or the possible deterioration of either the financial condition of the issuers of the equity securities or the general condition of the stock market.

    A UIT prospectus contains specific information about risks relative to the types of securities in the portfolio, as well as costs and expenses associated with this type of investment. Read the prospectus carefully before you invest or send money.

  • Variable Annuities with Death Benefit Rider

    Variable annuities are long-term investments designed for retirement subject to possible surrender charges and a 10% IRS early withdrawal penalty prior to age 59 ½. Death benefit guarantees may have additional fees associated with them. Guarantees are based on the claims-paying ability of the issuer subject to their terms and conditions.

    Prior to investing in a variable annuity, investors should carefully consider the investment objectives, risks, charges, and expenses. The contract prospectus and the underlying fund prospectus contain this and other important information. Investors should read the prospectus carefully before investing. For a copy of the prospectus, contact your financial advisor.

  • Variable Annuities with Guaranteed Minimum Withdrawal Benefit Rider

    Variable annuities are long-term investments designed for retirement subject to possible surrender charges and a 10% IRS early withdrawal penalty prior to age 59 ½. Guaranteed income withdrawal benefit riders may be available for additional cost. Guarantees provided through these riders are based on the claims-paying ability of the issuer subject to their terms and conditions.

    Prior to investing in a variable annuity, investors should carefully consider the investment objectives, risks, charges, and expenses. The contract prospectus and the underlying fund prospectus contain this and other important information. Investors should read the prospectus carefully before investing. For a copy of the prospectus, contact your financial advisor.

  • Variable Annuities with Principal Protection Rider

    Variable annuities are long-term investments designed for retirement subject to possible surrender charges and a 10% IRS early withdrawal penalty prior to age 59 ½. Principal protection riders may be available for additional cost. Guarantees provided through these riders are based on the claims-paying ability of the issuer subject to their terms and conditions.

    Prior to investing in a variable annuity, investors should carefully consider the investment objectives, risks, charges, and expenses. The contract prospectus and the underlying fund prospectus contain this and other important information. Investors should read the prospectus carefully before investing. For a copy of the prospectus, contact your financial advisor.

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