The Bucket Plan
Philosophy
A strategic, structured approach to
bucketing assets for today’s
financial dangers and challenges
Table of Contents
Title Page
Table of Contents
Introduction
The Money Cycle
Accumulation
Preservation
Distribution
The Risks to Retirement
Market Risk
Interest Rate Risk
Sequence of Returns Risk
The Bucket Plan
The “Now” Bucket
The “Soon” Bucket
The “Later” Bucket
Surviving Spouses: Considerations for Legacy Planning
A Final Note
Disclaimer
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Introduction
The old way of investing for retirement was to keep a little pile of money at the
bank and the rest of your money in a bigger pile of money in investments and
hope that it would last a lifetime.
Today, however, market risk, interest rate risk, and sequence of returns risk
present some of the biggest dangers facing investors at or near retirement.
As such, a more sophisticated planning philosophy is essential to stretch
retirement dollars to cover your many needs throughout the duration
of retirement.
For this purpose, we have developed The Bucket Plan® philosophy to segment
money into three different buckets based on your investment time horizon,
volatility tolerance, and income needs.
Accumulation usually starts when you’re
a child and begin putting money away in
a piggy bank and continues as you get
older and start your first job. The
accumulation phase lasts through your
working years as you build your life
savings and open up a retirement
savings plan.
The Money Cycle is something that we all go through during our lifetime.
There are three phases: accumulation, preservation, and distribution.
The Money Cycle
Accumulation
The Money Cycle
The last phase of the Money Cycle is distribution. This includes distribution to
yourself in retirement and to your family upon your passing. During this phase
is when you begin to draw from what you’ve accumulated and preserved and start
taking an income from your savings and investments.
The biggest mistake that people make is they go directly from the accumulation
phase to distribution and they never preserve a portion of their assets to draw
from in the first phase of their retirement. They continue to invest their money
as if they are a long way out from retirement when, in reality, it’s right around
the corner.
As you get closer to retirement, you should
move some of that hard-earned money into
the preservation phase. During this phase,
you’re financially stable and looking ahead
to retire within the next 10 years.
With retirement on the horizon, there’s less
time to make mistakes with your money
or experience major volatility because
you’re going to need this money sooner
rather than later.
Distribution
Preservation
To ensure that retirement income lasts a lifetime, investors have to prepare for
and manage certain risks. The three major risks investors face in today’s financial
marketplace include: market risk, interest rate risk, and sequence of returns risk.
Market Risk
Even though markets have historically gained over time, it has demonstrated major
swings and corrections over the past decade. If there’s a significant market drop
shortly before or early in your retirement—just as you’re starting to tap into the
distribution phase of your assets—the value of your investments could shrink to
an extent that brings long-term consequences. These consequences can become
even more severe in the case that you’re forced to tap into your investable assets
for income and sell a portion of it while the market is down, which virtually
eliminates the ability to “ride out” the short-term volatility and recapture your
losses as markets recover.
The Risks to Retirement
The Risks to Retirement
In an uncertain stock market, investors often rely on bonds as a safe haven.
However, like the stock market, interest rates can fluctuate over time. Lower
interest rates can reduce retirement income, which can force those who were
dependent on that money to tap into other investable assets. On the other hand,
rising interest rates can cause the market value of the bonds to drop. In the case
where you need to cash out bonds or bond funds for income, you may find yourself
having to sell at a lower price. This creates a risk for those who may need to
access their money sooner rather than later.
Sequence of Returns Risk
Sequence of returns risk describes risks associated with the timing of your
investment returns in relation to the timing of withdrawing money. This hazard can
be created due to a combination of market risk, interest risk, and an investor’s own
need to access their accounts prematurely. When you withdraw money from an
investment portfolio, negative returns early in retirement can cause the portfolio
to fail faster than if those same negative returns occurred later in retirement.
Interest Rate Risk
The good news is there is a way to mitigate the potential risks outlined in
this paper: market risk, interest rate risk, and, ultimately, sequence of returns
risk. A potential solution is to segment or compartmentalize money into three
different buckets based on investment time horizon, volatility tolerance,
and income need utilizing a proven planning process called The Bucket Plan.
Within the Bucket Plan, each bucket has a purpose to eliminate risks and can
help investors from making bad decisions that could hurt their long-term plan.
The “Now” Bucket is designed to be the stable and liquid money. Some examples
might include bonds and/or any cash stored in savings accounts or checking
accounts. Everyone has that magic number they like to have sitting in the bank as
an emergency fund. In addition to that emergency fund, this bucket is for setting
aside any major planned expenses that are going to be needed in the near future.
It is also important for those who are retired or about to retire, to add a year’s
worth of retirement income in the Now Bucket.
The “Now” Bucket
The Bucket Plan
The Bucket Plan
The “Later” Bucket is designed for long-term
growth and legacy planning. Having bought a
time horizon with the first two buckets, this
bucket may contain investment vehicles with
a longer time commitment and greater growth
potential. Think: investment portfolios, mutual
funds, and even long-term care insurance.
This bucket can play a critical role in legacy
planning too, particularly to provide income
for a surviving spouse.
The “Soon” Bucket is the preservation bucket. It is
invested for conservative growth like insurance and
annuity products and is the money that may be needed
to tap into sooner rather than later. This bucket may
be accessed for periodic distributions if additional
money is needed outside of what is provided in the
Now Bucket, or it may provide income in the first phase
of retirement. By investing conservatively, this bucket
avoids exposure to extreme market fluctuations and
the risk of having to sell assets for income at times
when the market is down. This helps avoid sequence
of returns risks by buying a time horizon.
The “Later” Bucket
The “Soon” Bucket
Surviving Spouses:
Considerations for
Legacy Planning
When most people hear about legacy planning, they think it refers to leaving an
inheritance for the next generation. However, in this case, legacy planning really
refers to making sure a surviving spouse has adequate income after the other
spouse passes.
It is a common misconception that a surviving spouse won’t need as much income
as the couple needed when they were both alive, when in reality surviving spouses
tend to need just about as much and sometimes more income as a couple does.
This is usually what happens when one spouse passes:
•Income declines: For example, in retirement one of the two Social Security
benefits goes away and a pension may get reduced or eliminated.
•Taxes may increase: Surviving spouses’ standard deductions get cut in half
(often their largest deduction) and may find themselves in a higher tax bracket
as a single person than they were as part of a married couple.
•Expenses stay about the same: Some expenses will increase because
services that one spouse provided may need to get paid for now. Fixed expenses,
like a mortgage, rent, and utility bills, really don’t shrink for one person as
opposed to two.
In order to ensure that your spouse and loved ones remain financially secure upon
your passing, it is essential to have a sound plan in place that can address these
needs and any unforeseen situations.
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