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(2) Annuities and long-term care and equities as part of the packageSECTION 3: THE BUCKET APPROACHLO 6-3-1: Analyze the bucket approach to retirement income planning1. A second way practitioners convert assets into a well-managed stream of income inretirement is known as the bucket approach (also called “time segmentation” and “agebanding”)2. The focus of the bucket approach is to break up retirement into distinct time incrementsand choose investments that deliver specified outcomes at different times.a. In rare instances, buckets are categorized not by time, but by the risk level of theassets, or the needs or expenses these assets are expected to cover. However,the most common type of bucket segmentation is by time and we will focus ontime segmentation in this course.b. How time segmentation works:(1) It is common to choose three 10-year time segments representing the 30years of retirement.(2) However, the segments can vary in length depending on the client’sdesires and can be more or less than 30 years.(3) The assets needed for the short-term horizon are invested to be drawndown in the earliest time segment. They may be invested in ladderedbonds, they may use an immunization strategy, or they may use someother liquid or cash position.(4) The goal is to provide specified streams of income for specified budgets atspecified times.(5) The assets needed for later time periods (the second and third buckets)are invested for growth. Both investment and product allocations can bedifferent depending on the corresponding bucket.(6) The bucket approach can compensate better than other approaches forthe fact that the client faces different risks in different phases of retirement.(7) Under the bucket approach, the planner and client think of the overallportfolio as separate buckets that are invested according to when themoney will be distributed.(8) Over time, assets in the second bucket are redeployed into the first bucket.In addition, assets in the third bucket are redeployed from the third to thesecond bucket.(9) As the client ages, the total portfolio would be adjusted to move slowlytoward a more conservative approach overall as assets shift from onebucket to another.(10)The bucket approach integrates asset allocation with income allocation.c. In a white paper by Principal entitled “Income Distribution: Comparing a BucketStrategy and a Systematic Withdrawal Strategy,” the following example is used:(1) To better understand the bucket strategy, we will demonstrate using anexample that utilizes three buckets.6.15