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The #1 Reason Why the “Bucket Strategy” Isn’t Enough for Today’s Retirees

Mark Lumia

If you are reading this article right now, it is likely that you fall into one of these three categories:

1) You’re retired

2) You will soon be retired and are in the process of planning your retirement

3) You’re a successful professional planning ahead for retirement

Regardless of which category you fall into, you’re in the right place. What you are about to learn is extremely important when it comes to building your retirement plan the right way.

You don’t want anything falling through the cracks, do you? And by “anything,” what I’m really referring to is income during retirement. When it comes to your retirement, you want to ensure that you receive income that will cover your basic living expenses (and more) for the rest of your life (and your spouse’s life).

Have you ever heard of the “Bucket Strategy,” also sometimes referred to as “buckets, pails, or segments”? If you have met with a financial advisor regarding your retirement plan, odds are you’ve been told about this strategy.

Here’s the problem, though: Oftentimes, advisors educate people on the Bucket Strategy and then just stop there. That may pose a problem, because if you want to build the most secure and effective retirement plan for yourself, the Bucket Strategy may need to be supplemented with other retirement strategies as well.

Don’t get me wrong; I’m all for the Bucket Approach (which I will explain in a minute). I think it’s a great strategy for many people, but it has its limitations in today’s economy.

People are living longer, and some are retiring earlier, which requires the need to receive income for an extended period of time. Sometimes, with age, new medical issues arise. More and more retirees require unexpected medical attention they did not budget for when first creating their retirement plan. And then there’s inflation – you need an income that will be guaranteed to keep up with it.

Now, let’s back up for a minute before we delve too deep.

What exactly is the Bucket Strategy?

Let’s think about it in a literal sense. Imagine having five buckets in front of you. This is what it looks like:

Bucket One – 0-5 Years (1%): Money to cover your expenses over the next five years. I call this your “safe money” because it is typically placed in a secure, but liquid, investment.

Bucket Two – 6-10 Years (3%): Money to cover your expenses from years six through 10. This is also considered safe money and we place it in a financial vehicle that can’t go down in value. One example is a five-year Fixed Annuity earning a guaranteed fixed rate of return with no fees deducted.

Bucket Three – 11-15 Years (4%): Money to cover your expenses from years 11 through 15. This money might be placed in something that should give you a better rate of return than buckets one and two, such as mutual funds or a fixed indexed annuity. If in a Fixed Indexed Annuity with an Income Rider that rolls up for 10 years (some call this a Hybrid Annuity), you could then turn on that income for your life and your spouse’s life to create an income you cannot outlive. This also accomplished a secondary goal of increasing your floor, which we will discuss later. This is an example combining strategies for your ultimate benefit.

Bucket Four – 16-20 Years (5%): Money to cover your living expenses in year 16 through 20. All of this money may be placed in equities or money management accounts. As you see, we are using a conservative rate of return, however, you are likely to do better.

Bucket Five – 21-25 Years (5%): As you can see, you may take more risk with the longer-term money in bucket five. The purpose of the Bucket Strategy is to prevent retirees from running out of money. The only problem with that is your money will never be guaranteed. The Bucket Strategy alone cannot make sure your income lasts the rest of your life, because what if you spend these buckets down? What happens once you spend the money in buckets one and four, and the market takes a hit and you lose all of bucket four? You’re left with nothing. That’s what happens, and that is the No. 1 fear retirees face today!

No one wants to risk running out of money in retirement. That is why I think the Bucket Strategy could be a great tool when used with other strategies that will GUARANTEE you income for the rest of your life, no matter what happens in the stock market. That includes accounting for inflation, the death of a spouse (in which case the income can continue for the surviving spouse) like I added above in bucket three, and even unexpected medical costs (with the right strategy, you can double your annual income specifically to cover unforeseen medical care costs).

Utilizing a “Floor Allocation” in Your Retirement

In retirement, you need to lock in a guaranteed income that will first cover your basic living expenses, which includes keeping up with inflation. I call this a “floor.” A floor can consist of anything that pays you income for life, such as Social Security, pensions, annuities, etc.

After the floor covers your needs (the amount of money you must have every month in order to survive), as well as your wants (which will allow you to continue living the lifestyle you desire), then you can comfortably invest the remaining balance in riskier avenues, like the stock market. It varies from person to person, which is why it is so important to speak to a Retirement Income Specialist who can help you form a plan that is 100% built around YOUR retirement, not someone else’s.

Two people might be in the same exact scenario as you, but decide to do different things with their remaining balance. One might decide that, since they have that guaranteed income that will cover all their wants and needs for the rest of their life, they can take as much risk as they want. And the other person might decide they aren’t interested in taking any risk and would rather play it safe. As long as you are receiving guaranteed income in retirement, what you do with the rest of your money is completely up to you!

Throughout my 24 years of helping retirees, I have discovered some little-known strategies that have saved people thousands of dollars in unnecessary fees during retirement. Instead of paying fees in retirement, their hard-earned money became part of their guaranteed monthly income. Wouldn’t you rather RECEIVE that money than PAY it?

About the Author:

Mark Lumia is Founder and CEO of True Wealth Group, LLC, which has its headquarters in Lady Lake, Florida, in an area commonly known as “The Villages.” Mark started his career as a financial professional after leaving the University of Florida in 1989. Mark is a Certified Financial Planner® (CFP®), Retirement Management Analyst (RMA) a Chartered Financial Consultant® (ChFC®), and Certified Advisor for Senior Living® (CASL®). He holds numerous other licenses and credentials such as Series 6, 7, 24, 26, 63 and 65. He is a Master Elite IRA Advisor® and an Infinite Banking Concepts® Authorized Practitioner. He also holds a Real Estate License. While Mark specializes in retirement income planning, his office also helps clients with Medicare and Social Security planning. On his free time, Mark enjoys spending time with his wife, Maryna, their two sons, Liam and Ian, and their beautiful daughter, Mia.

For more information on creating a lifetime stream of income for you and your family, call True Wealth Group at (352) 561-4571 [toll free is (800) 7Mark72] or visit www.RetirementMark.com.

 

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