Buckets of Money
When people consider retirement strategies they focus on the accumulation of assets. Whether that is through individual retirement accounts, 401(k)’s, etc. With this in mind, the focus of financial professionals becomes on gauging your risk tolerance level, designing a diverse portfolio, and detailing the pros and cons of stocks and bonds. The reality is that focusing on the way you will use your assets in retirement is equally important, if not more so. Did you know that most climbing accidents happen on the way down, not the way up? The solution to this issue is called “The Bucket Strategy.”
Overview
With the ‘Bucket Strategy,” the idea is that by allocating money into 4 buckets you can potentially increase the likelihood that you will have more income in retirement. The need for 4 buckets comes because no single tool can efficiently protect against longevity, health, volatility, and inflation. The four buckets are Income, Protection, Safe, and Growth.
Income
This bucket is all about getting a stream of money coming in monthly. You know exactly how much money you will receive no matter what happens in the markets. It is very predictable and will last a lifetime. Some of the vehicles we include in this bucket are Social Security payments, possible company pension plans, real estate income, and annuities.
Protection
Studies show that people are living longer and therefore the risk of having their assets depleted due to long-term care, medical expenses, and the death of a spouse is increasing. According to a study by the U.S. Department of Health and Human Services, 70% of people reaching age 65 today will need some form of long-term care.
Safe
This is a bucket of money that cannot decrease in value due to poor market conditions. What’s more, we can use specific tools that potentially allow your account to earn a modest return year over year. We sacrifice a slight amount of liquidity to achieve these results but nevertheless, the funds are there when you need them.
Growth
The idea is that in retirement we need our money to grow but not typically at the same rate as the accumulation phase so therefore these investments are typically conservative. Dividends while not guaranteed can be used to supplement income or reinvested.
Summary
Knowing what financial tools are good at helps build a solid strategy that can help you navigate those golden years with confidence. You wouldn’t use a screwdriver to hammer a nail right? Ensuring a successful retirement is less about how much wealth you can accumulate and more about how efficient you can be.