Simplifying retirement income with the high net worth pyramid

The bucket system for simplifying retirement distributions is designed to help investors manage fear-based reactions to the market and give them what Senior Retirement Income Strategist Kate Beattie calls “a mental accounting framework” to manage retirement spending.

For high net worth investors unlikely to run out of cash, that framework might not seem so necessary. But, as Aaron Petersen, senior wealth advisory manager with Capital Group Private Client Services says, “The emotional fear of markets declining impacts everyone.”

Part of the benefit of the bucket approach system is its adaptability: You don’t even need to use buckets. Petersen and his team use an objective-based approach modeled on a pyramid. Assets are separated into three segments: base, core and surplus.

Base
The base of the pyramid is designed to preserve wealth. Investments may include cash, short-term bonds, or insurance — assets that have tended to have low volatility risk — and are intended to supply one to two years of living expenses, depending on the client’s comfort level. During market downturns, these base assets can be relied on to avoid selling other investments. Some clients prefer to treat the base as an emergency reserve, spending instead from the core. Additionally, assets may be used to generate short-term cash flow if needed.
 

Core
The middle of the pyramid represents the bulk of the portfolio, with the goal to generate long-term growth and meet all living expenses with a high certainty of lasting throughout retirement. Investments may include stocks, bonds, and diversified alternatives in global markets. Some clients choose to spend from the core and preserve the base for emergencies. It’s important to fully fund the core before allocating more speculative investments in the surplus.
 

Surplus
The top of the pyramid is aspirational and includes everything beyond the core. Investments may include concentrated stock positions, private equity holdings, hedge funds and real estate investment trusts. Not all of Petersen’s clients use the surplus, and alternatives may include increased spending, taking lower risk in the core, or pursuing philanthropic goals. Speculative investments should only be considered once the core is fully funded.

Whether buckets or pyramids, the point of these approaches is to provide some structure for how portfolios are invested and spent during retirement while helping mitigate impulsive reactions to short-term market movements. As Chicago-area financial professionals Joe Schoenhardt and Jim Hinchsliff explained on the PracticeLab podcast, the system helps their clients understand that market fluctuations will affect their longest horizon investments the most, making it easier to weather downturns. “They panic because they see it as one pot of money,” he says. With the buckets, they may not like when the market’s down, but they understand that success is time driven.

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