Across cultures and history, people have divided their lives into stages. In classical Hinduism, for instance, there are four ages of man: the student; the householder/husband; the retired person and finally, the "sadhu" or wandering ascetic. Financial planners also divide lives into stages-and substages, to create portfolios that match our lifestyles and needs as we age. Within the retirement income market, growing numbers of planners are constructing "time-segmented portfolios" that divide the retirement years into stages, or time segments, to preserve assets for future cash flow needs. Most of them are throwing around the term "buckets" to describe the sectioning of the portfolio into discrete parts. According to the FPA's 2009 year-end survey of financial planners, a third of advisors are using this strategy for generating retirement income.

Time segmentation could eventually become the gold standard for retirement income planning. Whereas systematic withdrawal programs tend to treat each segment of a portfolio alike in order to maintain an optimal diversification strategy, time segmentation divides to conquer. The buckets can have their own specific components and risk profiles, with the immediate- term portfolio allocated completely differently from the segment needed 30 years from now. Even there, you'll find variation: Do you fill the 85- to 95-year bucket with growth stocks or buy low-cost longevity insurance?

Time segmentation provides a clear way to organize and explain retirement income planning to clients. Yet the practice remains controversial, even contentious, within the profession. Questions hovering over this approach include whether it is a good fit only for high-net-worth clients who can fill all the buckets from the get-go. Also, since the calculations involved can be complex, the approach can be a drain on the advisor's time.

There is a dearth of off-the-shelf time-segmentation solutions. And there are profound debates about the financial engineering involved. For instance, how much should be allocated to fixed income? Annuities? Insurance?

The lack of precise answers or even rules of thumb speaks to the relative obscurity and underdevelopment of a financial theory behind time segmentation that could provide better guidance. Furthermore, the most advanced application in the real world-liability-driven investing for defined benefit pension plans, which is a fancy cousin of time segmenting-is not directly applicable to the portfolios of individuals who don't face the same interest rate risks or accounting rules as corporations. Last but not least, the phrase "time-segmented retirement income solution" is the opposite of catchy.

Given this host of problems, in terms of both marketing and portfolio construction, why bother with time segmentation at all? "Compare it to the alternatives," says Zach Parker, director of annuities and insurance at Omaha, Neb.-based Securities America. "This approach is the most likely to allow retirees to achieve their goals."

DROPS IN THE BUCKETS

Time sequencing, however implemented, is based on a central behavioral insight: Having a guaranteed income stream for several years gives investors confidence about their portfolios-and by extension, their advisors. Investors can ride out market volatility, and maintain the assets and emotional comfort to take riskier bets for growth in the outlying buckets.

Beyond this very general set of beliefs, the industry is all over the map about how to build and fill the buckets. Asset Dedication, a San Francisco-based portfolio engineering firm, builds income-generating buckets out of individual bonds and CDs in partnership with financial planners, based on the individual client's needs. "The income portfolios are for a specific horizon, which rolls as the client ages," says company president Brent Burns. The fixed-income instruments are "self- consuming," which Burns says minimizes the amount of capital needed to generate income.

Sun Life Financial, in contrast, favors a guaranteed-income-for-life strategy incorporating fixed and/or variable annuities. This strategy can be deployed in distinct buckets or in a hybrid approach using annuities to build onto Social Security and create an immediate income floor. Says Steve Deschenes, Sun Life's senior vice president of annuities, "building buckets via an annuity allows people to meet basic expenses." Other buckets set for later years take more risks for growth. The annuity mitigates or can eliminate longevity risk, which is hard to hedge against using traditional asset classes.

Securities America's program, called Income for Life, creates a bucket for each five-year period of retirement. The advisor can fill each one from a broad menu. Interestingly, the program allows an advisor to think about diversifying and rebalancing across time as well as across asset classes; if, for example, clients spend less than expected out of their immediate bucket, or earn more than expected in a far-off bucket, they can redistribute the proceeds.