The Bucket Planning Process

The Bucket Plan® is a method to segment your money based on its desired purpose. Before giving a full explanation of the financial dangers facing retirees today, let’s lay the foundation by looking at something that everyone goes through during his or her lifetime: the money cycle.

The money cycle includes three distinct phases we all go through in life:

1. The Accumulation Phases – This phase starts early in life, when we are accumulating assets. During the phase we typically are willing to take more risk, because we have a long-time horizon and if we have losses there is time to make the money back.
   
2. The Preservation Phase - We start to preserve some of the assets we’ve accumulated through our lifetime as we get closer to our retirement goals. During this time there is less time to make mistakes with our money or to experience strong negative volatility because you’re going to need this money sooner rather than later
   
3. The Distribution Stage –This is when you begin to draw from what you’ve accumulated and preserved and start taking an income from your savings and investments. We are taking distribution to ourselves in retirement and to our family upon our passing.
   

The biggest mistake we see people make is going directly from the accumulation phase to the distribution phase. They continue to invest as if they are preparing for retirement a long way out, when they are retired or about to retire. The problem with this is that when the market has big corrections, as it always does, and you’re taking distributions –you’re essentially forced to sell your investments for income when the market’s down. You may not be able to make that money back and may deplete your savings much faster as a result. This is how you run the risk of running out of money later in life.

The need to preserve a portion of your assets as we approach retirement is crucial. The way to do this is to take a bucket planning approach to your distribution of income in the now, soon, and later time frames.

The Bucket Plan® is a three-bucket approach of segmenting your money based on the purpose and time horizon before you will need it. Essentially, we are buying income or a time horizon to invest the difference for long-term growth.

Let’s start with bucket 1 – the Now Bucket:

This bucket is designed to cover expenses in the first year or two of retirement such as cars, home repairs and an emergency or comfort fund. This bucket has little to no exposure to the financial market. Returns will be minimal and likely not keep pace with inflation, so we don’t want to have more money than necessary in bucket 1. This is typically the money in the bank.

Next we have bucket 2 – the Soon Bucket:

This is the money that we may need to access sooner rather than later so it should be invested for growth, but conservative growth. This bucket helps address two of the biggest risks in retirement: inflation and sequence risk. By choosing conservative investments, average returns should be expectedly higher than in the Now Bucket. This growth helps offset the rising costs of gas, groceries and other daily living expenses, providing a baseline of income and an inflation hedge where we can draw a little more as the years go on, and things get more expensive. And, by investing conservatively, you avoid the risk of taking out money at a market low, or sequence risk, as this account should not be exposed to extreme market fluctuations.

Finally, we have bucket 3 - the Later Bucket:

The Later Bucket is for the last phase of retirement. This bucket is designed for long-term growth and legacy planning. Since we have positioned money conservatively in the Now and Soon Buckets, we now have the confidence for bucket 3 to invest in higher-growth opportunities and longer-term commitments.

Sequence of Returns Risk is the risk associated with investment and withdrawing money during a time when your account balance is down due to investment performance. This threat can be created because of a combination of market risk, interest rate risk, and a retiree’s need for money sooner, rather than later. Applying a bucket planning process seeks to avoid the risk of withdrawing money during a time when your balance is down.