Blog

The Bucket System concept has been around for a while in one guise or another, but it has been popularized by a San Diego Financial Planner named Raymond Lucia in his book 'Buckets of Money - how to retire in comfort and safety'. The same basic idea in more technical papers uses the term 'bridge' instead of 'bucket'. The concept is quite different from the traditional way of thinking about investing during retirement.

Traditionally, investors in retirement are facing shorter time horizons and thus have less time to recover from a down market. This is handled by increasing the investments in 'safe' investments, perhaps using the rule of thumb of 'investing your age in bonds'; for example if you are 65, you would invest 65% of your assets conservatively.  With improved health and increasing lifespans, the rule has been stretched to 'investing your age less 10 in bonds', so a 65 year old would invest 55% conservatively. This is an admission of the problem with this approach....

Retirees are great travelers, wanting to see as much as possible before airline carbon credits get too expensive. One thing they most likely won't be seeing in retirement is the 'Eighth Wonder of the World'. Mark my words, this is one of the most important articles I will ever write and that you will ever read. It is the key to understanding the difficulty of retirement financing.

Albert Einstein referred to compound interest as the Eighth Wonder of the World. Interest compounds when the interest in savings in one period itself earns interest in successive periods. It takes time to get going, but once it does, the account balance literally takes off and increases exponentially. Before retirement, when you are earning and saving, compound interest is working for you, increasing your wealth.

Compound interest, and reinvesting your returns, results in some big numbers over time. Inflation also compounds, robbing those numbers of real purchasing power. With investments that return more...