One of the best ways to take the anxiety out of managing your investments after 60 is to keep things simple. That starts with using a strategy called the bucketing approach, paired with a passive investing philosophy.
Let’s walk through how that works.
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What is the bucketing approach?
The bucketing strategy separates your retirement savings into three time-based segments:
Bucket 1:
This holds the money you need in the next 12 months. Because you need this money soon, it should be kept safe in a savings account or something equally secure.
Bucket 2:
This bucket covers your spending needs over the next five years. It should be invested conservatively, think GICs or low-volatility bond funds, so that short-term market fluctuations don’t affect your spending.
Bucket 3:
This is the money you don’t need to touch for at least five years. Because you have time on your side, this portion of your portfolio can be invested in the stock market, where it has a better chance to grow.
Each year, funds flow from bucket 3 to bucket 2 to bucket 1. If markets are doing well, you refill the middle bucket from your growth investments. If markets are down, you wait it out and give those investments time to recover.
This approach creates stability and peace of mind, but the success of bucket 3 depends on how you choose to invest it.
Active vs. passive investing
There are two main approaches to investing: active and passive.
Active investing means trying to beat the market by buying and selling individual stocks. You can do this yourself, hire an advisor to do it for you, or buy actively managed mutual funds where someone else is making those decisions.
Passive investing means owning the entire market using low-cost ETFs that track an index like the TSX, S&P 500, or global markets. You’re not trying to outguess the market, you’re simply staying invested in it.
So which one is better?
The data is clear: most active investors underperform
Despite the promises of outperformance, most active strategies don’t deliver. Over the past year, 78 percent of Canadian mutual funds underperformed their benchmark. Over 10 years, that number jumps to more than 94 percent.
It’s not just a Canadian problem. The same pattern holds for U.S., international, and global stock markets.
Why is it so hard to beat the market?
There are two major reasons:
- Timing is tough. You not only have to sell at the right time, but also reinvest correctly. One wrong move can set you back.
- Fees eat away returns. Actively managed funds and advisors often charge higher fees, which makes it even harder to outperform a low-cost ETF.
An easier, smarter alternative
Instead of trying to pick the winning stocks or managers, most retirees are better off using a passive approach. For example, an all-in-one ETF like VEQT provides diversified exposure to Canadian, U.S., international, and emerging market stocks.
Since its inception in 2009, VEQT has delivered a strong long-term return. A $1 million investment at that time would be worth over $1.4 million today, with an annualized return of more than 7.5 percent.
A smoother path through retirement
Retirement investing doesn’t need to be complicated. With a solid plan, a bucketing approach, and passive investments, you can reduce your stress and improve your long-term outcomes.
If you’re not sure whether your portfolio is built on an active or passive approach or you want to check your allocation, feel free to just our website out and book an appointment with us.
