Is a Retirement Bucket Strategy Right for You?
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- čas přidán 7. 08. 2024
- A bucketing strategy can help you visualize how you’ll spend money in retirement. Ideally, this approach enables you to avoid selling stocks when they’re down, which might improve your chances of success.
Whether you use a 3-bucket strategy, two buckets, or any other method, the idea is to hold cash that can help you weather market crashes. The rest of your money gets invested for growth or income.
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With a 2-bucket approach, you simply have a cash reserve and an investment portfolio. Cash might cover one to three years (or any other period) of withdrawals. But if markets are rising, it might make sense to just spend from the investment portfolio and take profits off the table. Meanwhile, you keep that cash for more difficult times.
A 3-bucket retirement strategy adds an income bucket. The holdings might have moderate risk, and the idea is to have “less volatile” assets that can extend your safety cushion.
At some point, you need to manage your buckets. Shifting assets from one to the other can raise questions, and this strategy might prove to be more complicated than necessary. With two buckets, it’s pretty straightforward, but things get complicated as you add more.
It’s also important to remember that bucketing can mean you have a substantial amount in cash. That’s not necessarily a bad thing, especially when markets fall. But over long periods, that cash could lose purchasing power due to inflation.
Still, it’s nice to know how this strategy works. Whether you use it or not, you should get some ideas on how to manage your retirement withdrawals. Remember that the main goal is to reduce the chances of running out of money in retirement.
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More on this topic:
Morningstar’s Christine Benz talks bucketing: • Retirement Bucket Port...
More from Morningstar: www.morningstar.com/articles/...
Read the article here: www.approachfp.com/retirement...
CHAPTERS:
00:00 A Potential Solution to Challenges
01:40 Time Segmentation
02:34 Two-Bucket Strategy
03:11 Be Flexible (But Plan Ahead)
05:12 Three-Bucket Example
06:35 Bucket Management Over Time
09:44 How to Set Up Your Buckets
10:44 Challenges of Bucketing
11:46 Alternatives to a Bucket Strategy
Justin Pritchard, CFP® is a fee-only fiduciary advisor who can work with clients in Colorado and most other states.
IMPORTANT:
You can run out of money with this or any other strategy. It's impossible to cover everything you need to know in a video like this. The only thing that's certain is that you need more information than this. Always consult with a CPA before making decisions or filing a tax return. This is general information and entertainment, and is not created with any knowledge of your circumstances. As a result, you need to speak with your own tax, legal, and financial professional who is familiar with your details. This video is not a substitute for individualized, personal advice. Please verify with your plan administrator when employer plans are involved. This information may have errors or omissions, may be outdated, or may not be applicable to your situation. Investments are not bank guaranteed and may lose money. Opinions expressed are as of the date of the recording and are subject to change. “Likes” should not be considered a positive reflection of the investment advisory services offered by Approach Financial, Inc. The Comments section contains opinions that are not the opinions of Approach Financial, Inc., and you should view all comments with skepticism. Approach Financial, Inc. is registered as an investment adviser in the state of Colorado and is licensed to do business in any state where registered or otherwise exempt from registration.
Given that for the first time in history, bonds and stocks are down 15 percent in tandem, it's nice to have the cash bucket providing a feeling of safety. Thanks for the great content, Justin!
Yes, it's worked unusually well, and this is when you need it most. Thanks for watching and chiming in!
hoping to retire early next year. have 3 years in cash/I bonds/tbills and rest in stocks/bonds, so I guess I'm a 2 bucketer!
Sounds reasonable to me!
Three bucket allows you to adjust your taxable income. (ACA)
Thanks for covering this topic, Justin. As you said at 3:57 "And by the way it's probably a good idea to start building up this cash bucket a few years before retirement so that once you reach day one of retirement you have this money set aside already." For those of us near or starting retirement who have not created a multi-year cash bucket and who have the majority of their portfolio in a pretax 401K, what do you recommend regarding creating the cash bucket (bucket 1)? Sell pre-tax funds up to our desired marginal tax bracket (working or not) then buy laddered, high-interest CDs and T-Bills for the bucket 1? What if 20% of the portfolio includes after-tax brokerage stocks with long-term capital gains? How do I minimize taxes on both regular income and capital gains when filling Bucket 1?
always good stuff. Perhaps you can do a video about annuities. thank you
Thank you! I've got at least one old video on annuities, and I expect more to come. For example:
- How Annuities Work for Retirement: czcams.com/video/re0Pb1eKOM4/video.html
Thanks Justin excellent information.
Thank you, and thanks for watching!
I have the three buckets its working well especially with this down market that i retired into 2 years ago 45% in the market 45% in cds paying 4.5% and cash in 3 month and 6 rolling cds with a small amount in a bank
Good to hear that the strategy is paying off for you. That would help anybody sleep better these days.
I don’t trust online banks. I struggle with clicking buttons to buy CDs. How do you do it?
Great video. At what point during a market downturn do you start taking from your cash bucket. When stocks are 5% down, 10%, 20%, and when would you again start taking distributions from bucket 2 or 3 as the market recovers? Knowing when to take cash and when to resume taking from bucket 2 or 3 is critical in making the bucket strategy work throughout retirement IMO.
That's a great question, and I'm not aware of a great answer. I don't really use a 3-bucket approach, and from what I hear, that challenge (among others) is the type of thing that puzzles people who try to use it. I'm not aware of any robust research or great rules of thumb on how to manage the buckets over time, unfortunately.
Is it better to use TFSA as a growth bucket and RRSP as an income bucket? Or the other way around? Non-registered accounts will likely be more suited as a growth bucket due to capital gains which are more tax efficient.
My knowledge of Canadian tax rules is extremely limited, unfortunately, so I would not be the best person to ask. There might be some Canada-focused retirement or FIRE groups out there for better guidance on that.
Retired in may at 60. Does 5 years of spending in treasury bills (2 year) inside a 401k suffice for a bucket 1? I have been using it to rebalance into stock index while market down. Next year I will need to draw from it.
2-year Treasuries are pretty safe, although they can still fluctuate in price. They're safer than corporate bonds when it comes to default risk. But I'm assuming you have a bond fund/ETF in your 401(k) (I might be wrong), and those funds can certainly bounce around some. Traditionally, there would probably be some even safer holdings like cash in bank accounts for Bucket 1, but I can think of worse ideas than 2 year T-Bills. 5 years is a healthy cash bucket, and probably more than many people use. But depending on the details of your assets, spending, etc. (not to mention unknowns about the future), it might be just fine.
I wanted to ask you about a number to use for a proposed 20 year retirement. I think the formula that I saw was something like Annual Retirement Income needed divided by .04 = nest egg? My thoughts are that most sources I see online look at retirement needing to last until 90 or 95. I have a problem with this in that our family history strongly suggests a low probability of my wife and I living past 85 years of age. I am also considering that my wife is nearly 6 years my senior and that should either pass, there would still be my pension and SS income which should be ample for either as a single entity. So how should I change that .04 to make the formulae work for a 20 year retirement?
Yes, the 4% research was based on a 30-year timeframe (of course, anything is possible, and you can still run out of money with any withdrawal rate).
If you wanted to plan for more like 20 years, it seems reasonable to assume that you could potentially use a higher rate than 4%. But I don't know how much higher is reasonable, and I'm not aware of any research that focuses on a 20-year time horizon. For most people, a simple withdrawal rate isn't a reality anyway, as your spending will likely be "lumpy" in retirement (more spending in some years, less in others). More on that topic here: czcams.com/video/Z6znOGTduME/video.html
Ideally, I suggest doing some detailed planning on spending, withdrawals, taxes, inflation, etc. as opposed to things like the 4% rule of thumb.
Is Social Security and a pension considered Cash bucket?
That's a good question, and there are probably a variety of ways to look at it. For me, I don't consider those income sources as part of the cash bucket. Instead, I just think of them as reducing the amount you need to withdraw from assets over time. Effectively, that means putting less stress on the buckets. I'm sure there could be reasons for thinking of things differently, though.
What bucket would you put you Roth money in?
I can't say for certain what everybody should do, but something to consider: One popular view is to focus on growth in Roth accounts, which might mean a higher allocation to stocks in Roth. The reason is that the funds can come out tax-free if you meet all IRS requirements. So, if you subscribe to that view, you might leave the Roth assets as the longer-term buckets. But everybody's situation is different, and that might not be right for a given person. Please remember that investing has risks, you can lose money investing, and there's no guarantee of any growth over any timeframe.
Would a roth IRA be considered a cash bucket?
It depends on what you have inside of the Roth. A Roth IRA is really just a tax wrapper around your funds, and it's not, in itself, an investment. For example, you can often choose from high-risk to lower-risk investments-or even FDIC-insured bank deposits-within a Roth IRA.
Some people would say that Roth holdings might be better invested for long-term growth since any growth can potentially come out tax-free later if you satisfy all IRS requirements (check with a tax pro for more information). However, if you have cash in your Roth and you want to keep it that way, it can serve as a cash bucket. But it might not be the typical first choice for where to keep your cash bucket.