How to reap benefits by bucketing your money in the post-retirement period
Is your retirement approaching? Are you thinking about how you can manage your money after retirement? Bucketing your money can help you to achieve your financial goals.
According to the Life Insurance and Market Research Association (LIMRA) report, nearly 70% of Americans retire at the age of 66. Thereafter, retirees depend on their 401K, IRA (Individual Retirement Account), and savings in bank accounts to survive the post-retirement life.
Now, withdrawing the money intelligently in the after-retirement period is equally important as giving importance to savings. That is why the bucketing system was introduced, to divide your assets among several segments and spend it cautiously after retirement.
What are the 3 pillars of money-bucketing that will pave the way for you to lead a smooth post-retirement life?
The bucket strategy works on a 3-tier basis. As per the strategy, your retirement earning is divided into 3 buckets. Separate accounts will be created to meet the financial requirement of your post-retirement life.
The 3 bucket strategy will divide your retirement savings into 3 accounts by keeping in mind the short-term goal, the mid-term goal, and the long-term goal. Each of the 3 accounts will serve different goals for different time-periods in your after-retirement life.
It is designed to fulfill the living expenses with a limit for 2-3 years. The liquid cash is used in the short-term bucket category. You can include some investments in this category too for not making a gap in your lifestyle.
Maintenance of your car, repairing a part of your house, even a little weekend trip or vacation can be included in the short-term bucket.
The Medium-Term Bucket is made for 6 to 15 years. Medium-Term Bucket is ideal for that kind of investment from where you can get a fixed income.
For example, we can say that bank Certificate of Deposits and bonds are included in this category.
You can think about the Long-Term Bucket only when you can save an amount for at least 15 years. Indeed, a Long-Term Bucket possesses certain risks like financial loss and you need the patience to earn money from your investment.
The stock market, commodities, REITs, hedge funds like the mutual fund are included in the long-term bucket.
Let’s assume that you have a savings of $600,000.
Unfortunately, there is a gap of $30,000 between the income-needs (the funds you need to live your life) and what you have earned from social security and pension.
For Bucket One, your choice must be money-market funds like money market mutual funds and bank money market accounts for investment. Money market mutual funds are ideal for their low-risk and short-term nature.
Suppose you have invested $30,000 for one year.
Search for the money market mutual funds that can give you high yields with low expenses. You can search for them on the internet. You may get around 2.5% interest per year from these funds and their expenses are as low as 0.16%.
Suppose, $270,000 is the total decided amount for Bucket Two. On average you have thought about earning 4% interest per year. You should try to diversify or split your income portfolio as per your controlling capability.
It will save you from inflation and financial loss if you keep your money in a single portfolio. Ultimately, your aim is to earn 4% on average per year to sustain your life.
The remaining amount is $300,000. You must aim for a yearly 10.4% yield for 5 years. Like for Bucket Two, for Bucket Three your strategy should be to create a diversified portfolio. This is so that you can evade the risk of losing money.
In this way, the bucket strategy works in 3 tiers.
• The main reason people like the Money-Bucketing system is it will reduce the financial strain from you when the stock market will suffer a loss. Your short-term bucket is capable of giving you 4 years of support. It can bear any hindrance in this period.
• The other benefit of bucketing your money system is you do not have to compulsorily sell your investments every month to sustain your life. The short-term bucket and out of necessity the mid-term bucket will help you too in case you need some money urgently.
The systematic withdrawal plan or SWP is an investment withdrawal strategy for your after-retirement period. You can use the systematic withdrawal plan to withdraw money from mutual funds either per month, or quarterly, or annually by maintaining the 4% rule.
The 4% rule says you should withdraw 4% from your portfolio each year to sustain your life and not more than that.
Now, have a look why the bucketing of money system may give you more benefits than a systematic withdrawal system
1. The systematic withdrawal system runs on very basic theory. The systematic withdrawal plan theory generally targets the single asset allocation system and a normal 4% to 5% withdrawal per year. The core point is it is an easy-to-maintain system and runs in a predictable way.
When the market will go through a correction and downfall (nowadays it is happening quite often in the world), your total retirement-money will go down collectively. More panic-stricken, you may make more wrong decisions to save your retirement amount. The result may be more financial loss for you.
On the other hand, the bucket strategy is just the opposite of the systematic withdrawal system. It runs through a complex process and has multiple layers within it. Under the bucketing of the money system, you can take advantage of bucket one where you have cash and other liquid securities. So, a downturn in the market will only affect your bucket three. So, your retirement money is safe for short-term and even mid-term period for 10 to 12 years.
2. The bucketing of the money system is more diversified than the systematic withdrawal plan. The SWP system usually runs on a 60/40 income/growth or money market bond/stock market fund system. But you can witness more variation in the normal 60/40 plan if you adopt the bucketing of the money system. You are getting the chance of yielding a high equity income with the money-bucketing system if you have patience as well as courage to take the risk.
Do you still have doubts in your mind about bucketing your money system? Read these lines to get an overview of the bucketing system why it is better for people with fixed monthly income.
The chances of overspending will rise manifold if you keep all the money in a single place. You will be benefited for sure by keeping your money among several buckets. It will provide you relief from your financial woes by keeping your money safe by diversifying it among 3 buckets. There will be less chance of spending all your money and being an insolvent with the bucketing of the money system.
This was a guest submission from twitter.