We’ve all seen the popular Capital One credit card commercials that always end with the same question: “What’s in your wallet?” In the same way, I like to ask an equally important question: “What’s in your retirement plan?”
When considering this question, I’m reminded of a conversation I had recently with a couple who visited our office. They asked if they could simply retain us and pay us by the hour, as opposed to having us manage their investments. They went on to explain that the reason they didn’t want us to manage their investments was because they wanted to maintain the ability to pull their money out of the market at any given time.
When I asked what they meant by pulling their money out the market, they explained that it comes down to having peace of mind. Simply stated, they wanted the comfort of knowing that they could retrieve all of their money, wherever it was invested. In talking with them further, I discovered that they didn’t really want the ability to pull their money out; rather, what they actually wanted was emergency money. They wanted to be absolutely sure that if an emergency arose, they would have the funds to cover it.
While it’s true that we can’t predict all future emergencies and their costs, we can use a strategy called “The Four Buckets” to segment our money.
The first bucket in the Four Buckets strategy is a defined benefit or guaranteed income for life. Examples of this bucket include Social Security, company pension and custom pension.
The second bucket is associated with volatility of the principal, possible growth, and a long-term time frame of five years or more. Examples of risky money include equity markets, individual stocks and real estate.
The third bucket is associated with safety of the principal, yet limited access of money. Examples of safe money include fixed annuities, government bonds, and safety of principal and interest/gains.
Finally, the last bucket is a rainy day or emergency fund. This bucket is 100% safe and easily accessible. An example of this bucket is a checking or savings account. With a rainy day fund built into your financial plan, you can have peace of mind moving forward.
I explained to the couple that most people want to have income for the rest of their lives to cover expenses like groceries, medical costs, health insurance and living, while also keeping up with inflation. All the while, they also want to have some form of liquidity, or emergency money. That’s why we developed “The Four Buckets.”
A carpenter has many tools that work together to construct the final product, and your financial plan should have many kinds of investments and products to strategically play different roles. Just as there isn’t one perfect tool for the carpenter, there isn’t one perfect investment for the financial planner. A good plan will display a coordination of many different investments, working together for the client.
After explaining “The Four Buckets,” we often hear clients comment on the simplicity of the strategy and how they have never heard it explained that way before. By following this strategy, retirement truly has become plain and simple.
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