Bucket Strategy Planning

Planning for retirement isn’t just about saving money – it’s also about ensuring you have a solid strategy for withdrawing your funds. Given the increasing life expectancy and the changing financial landscape, retirees need to make informed decisions about distributing their retirement savings so they can do it wisely.

Working hard for decades and saving for your old age is a significant achievement. However, in order to maximize your assets, it’s important to consider the right withdrawal method(s) for you. When working with our clients, we analyze their situation and help develop the best strategy to withdraw assets in a sustainable and tax-efficient manner. In this article, we delve into some retirement planning withdrawal strategies to make you aware of the options.

Systematic withdrawal strategy

This is the most straightforward method where retirees withdraw a fixed percentage of their portfolio annually. For example, the 4% rule suggests taking out 4% of your initial portfolio balance in the first year and adjusting it for inflation in subsequent years.

Developed by William Bengen over 30 years ago, this strategy continues to be discussed in financial advisor circles. While simple and fairly straightforward to implement, it doesn’t account for market fluctuations. In bear markets, this strategy can lead to selling assets during low periods to meet the systematic withdrawal.

Required minimum distributions (RMDs) strategy

One option for investors who have a significant amount of their assets in qualified accounts is an RMD-type method. RMDs are mandated by the IRS for tax-advantaged retirement accounts such as traditional IRAs and 401(k)s. Once you reach the RMD age, you must withdraw a specific percentage of your account each year.

While this strategy ensures you’re taking money out, it may not align with your individual needs. A significant downside is that you take a higher percentage of your portfolio as you get older and your life expectancy is lower. Thus, a 75-yearold will be drawing much less from their portfolio each year than a 90-year-old. Some people may not be as active and willing to spend as much money when they are 90; they would prefer to travel and spend money in their 70s.

The bucket account strategy

The bucket account strategy is a more sophisticated approach to retirement withdrawals, aimed at providing retirees with financial security while allowing for flexibility and minimizing tax consequences. It involves dividing your retirement portfolio into three main “buckets.”

Cash and short-term investments (Bucket 1): This is your short-term fund, containing enough cash and highly liquid assets to cover your living expenses for the next 1-2 years. Bucket 1 ensures you won’t need to sell during a market downturn to meet immediate needs, thus reducing the risk of locking in losses.

Fixed-income investments (Bucket 2): This one consists of bonds and other fixed-income assets, providing a stable source of income for the next 3-10 years. Bucket 2 is designed to weather market volatility and generate a consistent income stream, allowing the other buckets to grow.

Equity investments (Bucket 3): This is the long-term growth portion of your portfolio. It contains primarily stocks and other high-return potential assets. You tap into Bucket 3 only when Buckets 1 and 2 are depleted. Over time, you replenish Buckets 1 and 2 by periodically selling assets from Bucket 3 or by rebalancing. Advantages of the bucket account strategy include:

Financial security: This approach provides a asense of security since you know you have immediate access to cash for living expenses.

• Tax efficiency: By planning your withdrawals strategically, you can minimize tax consequences. For instance, capital gains tax on Bucket 3 assets can be delayed until they are sold. This also lets you customize how much and when funds are pulled from retirement accounts.

• Flexibility: This strategy allows for flexibility in adjusting your withdrawals according to market conditions and your changing needs.

• Peace of mind: Knowing you have a well-structured plan can reduce financial stress and allow you to focus on enjoying your retirement. While the bucket account strategy offers multiple benefits, it’s not without its challenges. Issues to consider include:

Retirement planning doesn’t end when you stop working; it extends to how you withdraw and manage your savings during retirement. The right strategy for each of our clients depends on whether their assets are in retirement or taxable accounts, how much they are looking to withdraw from the portfolio, and the timing of their cash needs. Our advisors may employ one of these strategies or a combination of them based on the specifics of a client’s situation. We may also deploy the bucket strategy without necessarily opening a separate account. For efficiency and simplicity, we may include several buckets in one account. As always, don’t hesitate to contact your advisor with questions or thoughts on your strategy.

-Jason Print, CFP®

Co-President & CEO