section 1 - The American College Online Learning Center

(2) It serves as a form of mental accounting.(3) It compartmentalizes assets into a long-term box which may be perceivedas “locked” (and thus not available for current consumption).LO 6-3-3: Understand how bucket portfolios should be reallocated overtime1. Up to this point, we have looked at segmenting investments into three portfolios and howto initially create those portfolios. (Video: With the multiple retirement portfolio approach,how should portfolios be reallocated over time? Littell, Tacchino, Basu)2. Under the bucket approach, the portfolio will be depleted at the end of each time period.(Editor’s note: this is a different way of approaching the bucket portfolios than wassuggested in the Principal white paper discussed earlier which consistently replenishedthe “spending bucket.” Both methods are viable ways to reallocate the client’s portfolio.)3. Under the bucket approach, we recognize that at each period of time, significant lifestylechanges can occur.a. Each period has different expense structures.b. Example: After 75, leisure activities go down and health care expenses go up.4. The bucket strategy allows the client to adapt goals and vision over time.a. Changes to the investment portfolio accommodate the natural fluidity of retirementand life changes.5. Reallocation of the portfolio starts with a budget.a. Look at what is actually spent compared to what was projected to be spent.b. As a general rule, planners need to monitor spending so it meets the budget (getclients back on track).c. However, sometimes spending changes are needed.6. In addition to being adapted to changing budget needs, the portfolio can react to achanging economy.7. Planning Point: Planners should not confuse the need for budget changes andreallocation with the need for an emergency funda. The emergency fund should be used in some instances.b. A changed budget and asset allocation should be used in others.c. Planners need to keep in mind there are some things clients cannot do evenfor their families.8. Planning Point: By monitoring their clients, planners can restructure the portfolio basedon spending, the economy, and inflation.9. The bucket approach allows a more adaptable investment plan.a. Buckets can be invested for the unknowns.b. If planners err on the conservative side, and things do not go awry, then the clientwill have more money for their heirs.6.20