The three bucket strategy is a popular retirement method that involves saving for short-, medium and long-term goals. For some investors, adding gold into the mix can allow for diversification and a hedge against inflation.
If you’re saving for retirement, here’s how to plug gold into a bucket strategy when you’ve never owned the precious metal before.
How does the bucket strategy work?
The first bucket experts recommend that savers fill is for the short term. This is typically made up of cash and cash alternatives, such as certificates of deposit (CDs), that will help you pay for your everyday expenses, like housing, gas and groceries. While financial advisors tend to recommend building an emergency fund that can cover your expenses for three to six months in case you lose your job or a surprise bill pops up, that timeline may be stretched to one to three years for retirees. That’s because in retirement, you no longer have a paycheck to cover your living expenses, and you don’t want to be put in a position where you have to sell long-term assets during a correction and lock in permanent losses.
The second budget generally consists of bonds and income-generating stocks. Think of this bucket as cash that you may need in three to seven years.
The final bucket contains long-term growth assets that have time — like eight years or more — to ride out volatility. You shouldn’t have to touch these assets until that time in order to give these stocks enough time to recover from corrections.
You can and should adjust the bucket strategy to fit your goals and risk tolerance. For example, it may make more sense for your second bucket to include money you won’t need in three to five years, and your third bucket to consist of money you won’t need to touch for at least five years.
Where gold fits into the bucket strategy
Like with stocks, gold’s price can be volatile in the short term. That’s why it should generally be allocated to your third bucket. Ideally, you won’t need to sell the gold for a set amount of years, which gives it flexibility to recover from market downturns.
Beginners may want to purchase gold via exchange-traded funds (ETFs). These funds are highly liquid and less complicated to invest in than physical gold, which is less liquid and could come with additional costs, such as shipping, storage and insurance.
While gold can be a valuable asset to add to your portfolio, you shouldn’t sell all your long-term assets to buy gold. It’s important to maintain a well-diversified portfolio so that when one portion of your portfolio performs poorly, another will hold steady or even outperform. (Gold and stocks tend to not move in sync, which is why gold is seen as a good diversifier.)
Experts typically recommend limiting your gold exposure to 5-10% of your overall portfolio. Beginners may want to start with a small portion and gradually accumulate gold leading up to retirement. Keep an eye on how much of your portfolio gold is taking up. If it grows in value, you may want to rebalance by selling some gold and investing that money in an asset that is underweight in your portfolio.
What to consider before you buy gold
Before you buy gold, it is important to assess your risk tolerance and financial goals. Ask yourself the following questions:
- What is your time horizon for medium-term and long-term assets?
- How much money do you have to withdraw each year to cover expenses?
- Are you comfortable with sharp price swings, which gold may exhibit from time to time?
- Do you prefer storing physical gold or investing in a fund?
Keeping the bucket framework front and center can allow you to invest enough in gold to benefit without taking on too much risk.
