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What is the Retirement Bucket Strategy?

Planning Matters Radio / Peter Richon
The Truth Network Radio
May 4, 2024 10:00 am

What is the Retirement Bucket Strategy?

Planning Matters Radio / Peter Richon

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May 4, 2024 10:00 am

It's possible to achieve sustainable income in retirement by utilizing the "Retirement Bucket Strategy." This strategy involves dividing your retirement savings into different "buckets" based on your time horizon and risk tolerance. In this video, Peter with Richon Planning and Erin Kennedy explain each bucket:

-Short term Bucket

-Intermediate Bucket 

-Long-term Bucket

These buckets represent different asset classes or investment strategies tailored to meet your income needs at various stages of retirement. The strategy aims to provide a reliable income stream while managing investment risk and ensuring your financial security throughout your retirement years. If you'd like to find out whether your retirement savings are properly segmented, please reach out to Peter by calling (919) 300-5886 or visit

#Retirement #WealthManagement #Taxes #Investing


Peter, good to see you. Welcome back, everyone. Today we are talking through the retirement bucket strategy.

You've probably heard of it before. Everyone, of course, wants a stable and sustainable income in retirement. And the retirement bucket strategy divides your savings into three buckets. Each bucket has a different time horizon and purpose, which ideally will lead to a steady income in retirement.

So let's start real high level. How does the bucket strategy work? Well, there are actually a few different ways that we could look at these buckets, and they sort of all coincide. But the time, the tax, and the risk, all of those are sort of different buckets. You've got your very conservative.

You've got your moderate. You've got your aggressive from a risk perspective. You've got your tax deferred, your taxable, and your Roth money from a tax perspective. And then you've got your short-term money, kind of intermediate money, and then longer-term money for the growth and the retirement bucket. And then you've got the growth and the risk perspective. And a lot of times, it really does come down to the correct order of operations. If you remember math class, there was a specific order you had to do math equations in in order to get the right answer. And there is an order in which withdrawals and layers of investments and different financial tools should be oriented in retirement in order to get an optimal outcome of income and growth.

And that's really what this bucket strategy analogy is all about so that we can more easily visualize how our money is segmented into what purpose it is dedicated. PEMDAS. PEMDAS, yeah. Please excuse my dear Aunt Sally. That's right.

I'm glad you put me on, so I can't believe I still remember that. Yeah, yeah. So it's sixth or seventh grade math. Right?

It's a long time. But we use math all the time, and it is a universal language. And I still see brain busters that people debate kind of that order of operations. And I also see people in the financial world get this much righter than others with how they have ordered their operations for withdrawals strategy. You need to create a fun acronym then so that we can all remember it, Peter.

All right. Let's start with our first bucket, though. What is in that short-term bucket? So the short-term bucket is more about safety and accessibility. This is money that the day after retirement we're probably going to be using this money or is there for emergencies.

So its job is not truly growth. We want something that is liquid and accessible and safe and hopefully earning a little bit of interest, but that may not even be the primary job of dollars in this bucket, something that we can pull from. And over a period of time, it may be something that we are drawing down on, like this bucket may be one that we actually intend to exhaust over a certain period of time because we sort of have that water wheel phenomenon with this bucket analogy where the intermediate bucket and the long-term bucket, they're in the background filling up to replenish the first bucket. So this is more cash, cash equivalents, money markets, CDs, even within this bucket, which may be purposed for three to five years into the future. You could even sub optimize time, time orient this bucket that if it's money that we need this year, that needs to absolutely be in cash. Maybe it's money that we know we're going to need next year or three years down the road.

That might be in some different instruments like CDs or something that we can lock in right now and earn a little bit better rate of return and interest on. So even within the buckets, we can sub bucket and sub optimize. But yeah, the short term bucket, that first bucket really is more about safety and liquidity.

And yes, I know that we're not generally getting a tremendous amount of growth, but money is a terrible multitasker. And that's just not the job of this bucket. We assign that job to other buckets down the road.

Right. And one job with that bucket, too, is preventing against sequence risk. Can you explain that risk and how the first bucket helps prevent it? Sequence risk is something that we have been able to avoid during our working career because our paycheck served the job of the first bucket.

It was there and it provided us an income so that we didn't have to withdraw money if and when the market was down. And sequence risk says that if we don't have that paycheck and are now having to make withdrawals and then the market goes down, that that can be catastrophic for our retirement projections and outlook. And we don't know when down markets will or might occur. But if they do happen in the short term, first several years of retirement or even in the first few years leading up to retirement, it can again impact the entire trajectory of retirement. Nobody wants to see him at any point in time, but it sequence of returns risk. If we look back in history at some of the major downturns that have happened over the last quarter century, if somebody retired right before the dot com bubble or the 2007 Great Recession or even covid, although that was a short lived downturn and a precipitous bounce back up, though that first time was really nerve wracking for folks and then certainly 2022 was a really rough year.

If somebody retired right at the end of 2021, that would have been a difficult year to then recover from. You may have removed some dollars because of sequence risk and therefore locked in those losses and remove those dollars ability to participate in a recovery, which again, Aaron, is why we've got these different buckets. We've got the growth bucket in the background that is intended for seven to 10 or more years out in the future. Those dollars have plenty of time to recover. Our short term bucket bucket number one shouldn't be exposed to them at all.

All right. Well, let's move on to the second bucket real quick. What is in here and what is its purpose? This is maybe a bucket that we put a little more risk on, but we know that these dollars are going to need to spill over and serve the role of bucket number one into the intermediate future. So maybe five to seven years in the future, we are going to need those dollars. So I wouldn't put high, high speculative kind of risk on this bucket, but maybe moderate to moderately conservative kind of risk is appropriate. This may be more bonds or fixed income, something that's going to grow with with an interest rate and bonds might be positioned to have a banner return and rally kind of year this year or next year. If the Fed does follow through and lower interest rates, we may see some appreciation and better yield and income from bonds. This may be something that is more purpose for generating income, but then reinvesting it like a dividend reinvestment program with some of the more stable value dividend producing kind of companies that are out there could be fixed or fixed indexed annuities. Not something that you want a great degree of risk on, but something that is going to build and maybe ratchet and lock in those losses or I'm sorry, lock in those gains and avoid losses into future years is going to be something that is appropriate, not something that is exposed to a tremendous amount of risk or loss.

All right. And then last, of course, we have our long term bucket. This bucket has become increasingly important simply because we are living longer. I mean, your retirement might be as long as you're working years.

Yeah. And again, optimizing for time, for tax, for risk. This is the bucket that if we've got Roth dollars, growth in a Roth account is where it is most advantageous. So from a tax standpoint, I would strongly consider using this bucket as the Roth bucket with a couple exceptions. If we need to have some specific strategic moves earlier on in retirement potentially. But generally, we want that Roth money to grow as much and for as long as possible.

So we leave that in the bucket and then more risk could be appropriate here geared toward your comfort level and your risk tolerance. But this is the bucket that we need that growth with. Remember, we've sort of sacrificed growth on on those other buckets. So assigning specific tasks to specific dollars where one dollar is going to be more liquid and safe and not have a whole lot of growth. We need more growth out of other dollars. And because it's long term, 10 or more years out into the future, we likely have time that even if we do experience a market decline or volatility, that we've got the time to recover from it.

And you may have picked up on this, but this has to continue to evolve. This is not just our timeline on day one of retirement. These years and this outlook and this timeline in front of us continue to move along with us. It's always going to be the next three to five years, the next five to seven or the 10 years plus. Right.

So it's not something that we set at 62 or 65. And then, oh, we're going to just leave that money in high growth until we get there. We continue to make adjustments and balance between the buckets as needed as we go. And I think that's also an important point. And we can do that again from a time, a tax and a risk standpoint along the way.

Those buckets sort of go go hand in hand. And really, it's all about our need for income now and our need for continued future growth into the future. Right. Peter, if somebody has questions about how they should segment their money to avoid risk and again, make sure that they are, you know, their money doesn't run out.

What's the best way to reach you? Give us a call at Rashaan planning nine one nine three zero zero five eight eight six nine one nine three zero zero five eight eight six. We do offer to put together. We call it the optimized retirement plan. It's a document that outlines income, investments, taxes, health care and legacy.

And everybody, every plan should have addressed at least those five high level items. We do that. We put it in writing. We present it for you.

There is no cost, no obligation. You're welcome to share as much or as little information as you feel comfortable. Of course, the more that we discuss and that you're open about the better plan that's going to be ultimately. But I think that everybody should have a documented plan that addresses those five items. And this bucket strategy will fall into that, especially when we're talking about income, investments and taxes. And Aaron, it's important that for some people, because of the cost of health care, that we've bucketed off some money, maybe specifically to address that issue if we have no other form of protection.

That is that may be a bucket all to itself on its own. And then the reality is not everybody cares about leaving a great deal of legacy behind. That's fine. That's not selfish. But if we've addressed all of these other things and properly bucketed, then more than likely there is something to be left behind.

So talk about legacy as well. All right, Peter, thanks so much for your time today. Always a pleasure. Thank you.

Everyone, Peter Rashad here. Hope you enjoy the content. As always, make sure that you like, subscribe, share the videos with others that may find this information helpful. And as always, you're welcome to be in touch or to submit questions or comments. You can comment below the video anything that you'd like to see or hear shared on our YouTube channel. And in future videos, you've got a topic that you've been thinking about or is of concern for you financially. Be sure to let us know. We'd love to help you by discussing it on the channel. So appreciate the continued views and the likes and the subscribes, the shares, the comments. Always helpful. We look forward to getting you the information that you need. This has been Planning Matters Radio. The judiciary duty extends solely to investment advisory advice and does not extend to other activities such as insurance or broker dealer services. Advisory clients are charged a quarterly fee for assets under management while insurance products pay a commission, which may result in a conflict of interest regarding compensation.
Whisper: medium.en / 2024-05-04 10:07:55 / 2024-05-04 10:12:59 / 5

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