Creating a Financial Plan for Today’s Volatile Economy

One of the biggest and most common mistakes that investors can make, especially at and near retirement, is considering all of their total assets as a single bucket of money. This one lump sum may be responsible for providing income, growth, major medical expenses and Long-Term Care protection, inheritance, and more. The fact is there is no single investment on the market today that can possibly meet all of those goals at the same time. However, by strategically segregating or “bucketing” your savings into multiple buckets based on the purpose for those dollars, you can then begin to determine more appropriate investments to meet each specific goal.

Here is an example of what this might look like for someone age 62; we’ll call her Sally. Sally’s Social Security and pension provide the income that she needs today, but between projected inflation and her required minimum distributions that will kick in at age 70.5, we anticipate that she will need to start taking an additional $1,400 a month from her savings beginning in 8 years. Her primary goals for her savings are to provide the consistent income needed to support her retirement lifestyle, while also providing enough potential growth to hedge against inflation, healthcare costs and taxes. To accomplish these goals, we helped design her personal financial plan with three “buckets” of money.

Bucket One | Purpose: Income | Timeline: Start in 8 Years

The contents of bucket one will vary from client to client. However, in retirement, income is one of the most common essential goals that we hear from our clients; as such, this is often the driving purpose of bucket one. First, we will determine how much of a total portfolio will be needed to accomplish specific income goals. We will take into consideration taxes and future required distributions to position the most favorable accounts for income in this bucket. And finally, we will identify the most appropriate potential vehicles to provide that consistent income for life. In Sally’s case, we anticipate an eight-year time period prior to needing income, which impacts our selection process and recommendations as well.

Bucket Two | Purpose: Cash Needs | Time Horizon: 5 – 10 Years

With projected income needs solved by bucket one, the next priority is to create a bucket to resolve cash needs. This may cover unexpected inflation or possible large expense needs early on in retirement. In Sally’s case, this bucket provided the peace of mind that should she need major home repairs or even choose to take a spontaneous trip with her grandkids, these dollars are available as needed. Another common scenario for bucket two is for families with a large portion of their savings in traditional retirement accounts. At times, these accounts require more income to be taken than is actually wanted or needed by the client due to required distributions (RMDs). For these families, bucket two may be used strategically towards their unique long-term goals, such as funding a life insurance policy to maximize a legacy or to pay taxes on a Roth conversion.

Bucket Three | Purpose: Growth | Time Horizon: 15+ Years

Bucket three aims to provide continued wealth accumulation throughout retirement. By addressing income and cash needs with the first two buckets, this bucket can take on more risk and market opportunity having an anticipated time horizon of 15+ years. In retirement, these dollars may provide reserves for future Long-Term Care scenarios or be passed down to beneficiaries as legacy.

As you can see, there are various factors to consider as you enter and maintain your retirement lifestyle in today’s economy. With proper planning and a structured, personal approach, you can strategically segment your savings to help accomplish these goals. No two plans can or should be identical. Instead, every investment plan must be customized for individual needs. If you are ready to learn more about building your personal financial plan for retirement, contact us today at (803) 547-7853 for our Charlotte office or (843) 757-9400 for our Hilton Head office.