Structuring your retirement plan is key if you want to secure your retirement. If you’re younger and still earning a healthy income, your goal is likely to have more risk. However, if you’ve been retirement planning and are just a few years away from finally reaching your milestone, your plan’s structure will be different.
One thing we talk about a lot on our podcast is buckets, and today, we really want to go more in-depth on the retirement bucket strategy and how it works.
Here is the strategy we use to:
- Build wealth
- Generate income
And the retirement bucket strategy is simple. In the next few minutes, you can learn how to use the same strategy we use to be comfortable in retirement.
How Do I Structure Everything I Have in Retirement?
If you’ve been putting money aside for retirement and making your money work for you, you will come to a point where you need to structure your accounts differently. Structure provides security, emergency money, income, and growth.
When people are working, they generate income and it’s easier to put money away.
However, when you retire, you flip a switch and then must use the money you saved to generate an income. Stopping work is a major shock for most people, and the vast majority are often concerned about whether they have enough.
Whether clients have $1 million or $10 million in their retirement accounts, they’re always concerned that they’ll run out of money. Many people rely on the growth of 7% to 10% in the market, and then when you have the Ukraine / Russia war and pandemic, anxiety sets in due to market volatility.
The retirement bucket strategy helps you structure your retirement in such a way that you don’t have to rely 100% on volatile markets.
Introducing the Retirement Bucket Strategy
Our bucket strategy has three main buckets, each with its own roles and purposes.
Bucket 1: Liquid Cash
You can view liquid cash as sort of an emergency fund or a feel-good fund. Many clients have this cash tucked away, often in an FDIC-protected bank account, for when any of life’s unexpected events that pop up.
Bucket 2: Income
You rely on the income bucket to generate income now that you’re no longer part of the workforce. Many people have the following in this bucket:
- Social Security
- Other income options
Income buckets often do not generate enough income for all your needs and wants if they only include Social Security and pension. However, when appropriately structured, these buckets do generate nice income streams that allow you to pay your bills.
Income Buckets Disconnect from Markets
Your income bucket is crucial to your survival. If you’ve been looking into retirement for a long time, you may have heard of the 4% rule. The rule states that you can take 4% out of your retirement each year because it will be made back up with market gains.
However, let’s assume the following:
- $1 million in retirement funds
- 4%, or $40,000, taken out of these accounts to live each year
- Market slump cuts retirement down to $600,000
In the above scenario, when the market fluctuates and you’re using the 4% rule, you’ll either must live on $24,000 a year or take out 7% that year to live.
These risks are far too great when you’re not in the workforce or generating income. Instead, we recommend all the accounts in your income bucket be 100% detached from the markets so that you can be confident that you have the money each month to pay for your necessities.
Bucket 3: Growth
A growth bucket is designed to help you grow your retirement over time. These buckets have risk and volatility. In many cases, the growth bucket is a long-term bucket that often includes investing in the market.
Retirement Bucket Strategy in Practice
After structuring these buckets, let’s assume that you have:
- $1 million in retirement accounts
- Social Security/pension
- Need an additional $2,500 a month in income
In this case, we may recommend the following retirement bucket strategy:
- Put $50,000 in your liquid cash bucket that’s easily accessible
- $450,000 goes into your income bucket
- $500,000 into your growth bucket
With this structure, we can run some modest numbers here and see how all of this works out in the long term. In your income bucket, let’s assume that you want a 3% rate of return on your $450,000, and this would generate $2,500 a month for you for 20 years before the money in this account runs out.
At the end of 20 years, the bucket is eliminated if the rate of return is just 3% per year.
Now, during this 20-year period, you’ve had your $500,000 growing at a very conservative rate of 6%. The growth bucket would have $1.7 million in it if you didn’t touch it at all.
If you retired at 65 (you’re now aged 85), you would have $1.7 million left in your growth bucket to do a few things. Ideally, you’ll place some of this money into your income bucket to help fund your lifestyle for the next 10 – 15 years – easily.
The retirement bucket strategy makes it simple and easy to retire with peace of mind.
If you want peace of mind, this simple strategy can provide it. Of course, we are always here to help you with an individualized retirement plan that better fits your needs.