It seems as though financial advisors are all too often left to make important investment decisions for clients based on clients citing something like, “You’re the expert” or “I don’t really understand all of this, so you decide.”
As clients draw closer to retirement, they become overwhelmed by the myriad choices regarding their investments. This can result in disjointed retirement plans that are based on an individual retirement account here, Social Security there, and a mishmash of pensions and 401(k) plans in between.
Realizing that an empowered and informed investor is a happier client is one of the reasons that I developed The Bucket Plan, a financial planning process that clients will actually understand. The Bucket Plan simplifies the planning process and provides the advisor with information to structure a plan that can enable the client to not only retire but also to achieve the type of retirement that they truly desire.
One of the biggest concerns facing retirees today is running out of money. Because people are living longer, this is a valid concern. So before they make the decision to retire, they come to their advisors for advice. The clients’ journey from a vague understanding of their retirement goals to a comfortable knowledge of their solid, strategic three-bucket plan is one that we can all relate to on some level.
So, what is The Bucket Plan exactly? The Bucket Plan is a retirement planning strategy based on three distinct buckets of assets, divided to emphasize when those assets will be needed. The three buckets are:
- Now. The Now bucket is what we call safe and liquid money. It doesn’t grow much, but it’s also not exposed to risk that it could otherwise be exposed to if it were invested. This bucket includes all the money the client could need now, including an emergency fund, money for upcoming planned expenses and the first year of income if they are retiring in the near future. Clients can sleep better at night knowing money is there when needed.
- Soon. The Soon bucket is often considered the “preservation” bucket. This bucket includes money that the client may need soon, so the funds are intentionally invested for conservative growth. A client may access this money for additional funds beyond the Now bucket or to provide income during the first 10 years of retirement. Things such as bonds and CD ladders, as well as and annuities built on a fixed chassis, fit in this bucket. A big correction or downturn won’t impact the client’s spending plans during their early retirement years.
- Later. The Later bucket is where we house the assets earmarked for long-term growth as well as legacy planning, as they are funds that will not be needed until later. Using The Bucket Plan, the client should be secure with the money in the Now and Soon buckets for at least 10 years, allowing the funds in the Later bucket to be put into longer-term, growth-oriented investments. As the Soon bucket is spent down over time, assets from the Later bucket will be used to replenish it. We call this reloading the Soon bucket.
To help us and the client understand their risk tolerance, priorities, concerns and income needs, we’ve developed a series of tools that support our Bucket Plan process. These tools allow us to be strategic in our recommendations to the client, while staying within the parameters they provide and letting them be active participants in the process. Let’s look at these tools and how they work.
We developed a concerns and priorities ranking worksheet to give us some insight into what really keeps clients up at night when they think about retirement. The client is asked to use the worksheet to rank various financial concerns and priorities from one to three.
We educate the client on the three phases of the money cycle (accumulation, preservation and distribution) as well as the biggest mistakes we see people make.
The accumulation phase (earning, saving and investing) begins the moment someone starts earning a living, and it continues into the preservation phase, which typically takes place about five to 10 years before retirement.
The final phase is the distribution phase, when investors take distributions from their accounts for use as income in retirement and when distributions go to the family upon their passing.
The biggest mistake people make is going directly from accumulation to distribution without preserving a portion of the assets that they will draw from during the first phase of retirement.
We present a financial plan in terms that a client can readily understand, making it easier for them to accept our proposed strategies. The Bucket Plan philosophy is a simple concept and is basically an asset-positioning philosophy based on the time available to invest and the eventual purpose of the funds.
Bridging The Income Gap
What’s unique about The Bucket Plan is the Soon bucket, the bridge between a client’s safe assets (Now) and the money that’s set aside for long-term growth (Later). Instead of making the common mistake of jumping from Now to Later, the Soon bucket gives investors extra time to invest the Later bucket funds for optimum growth in the early phase of retirement. This is why the Soon bucket is often referred to as the “preservation” bucket or a bridge.
An income gap assessment tool helps the client to see the difference between their retirement income sources and their retirement income needs. This assessment is broken into three sections, making it easy for the investor to see and understand the results.
First, we look for the net after-tax income that currently covers living expenses. Next, we add up any fixed income in retirement, such as pensions or Social Security. Then we look at adjustments, which include any major expenses that are changing in retirement, such as mortgage payments or health care.
Subtracting the expenses (after adjustments) from the anticipated retirement income gives us a fairly accurate picture of the investor’s post-retirement financial life and the income gap that we need to fill.
A volatility tolerance analysis is a key tool, as it establishes how much investment risk the client is willing to accept within each bucket, thereby guiding the financial advisor’s recommendations.
A two-prong risk assessment, one each for the Soon bucket and the Later bucket, is necessary to fully grasp the client’s tolerance for volatility in each bucket. Keep in mind that there is a different purpose for the funds in each bucket, so what is tolerable in one bucket may not be acceptable in the other. Going through this process will help the advisor understand how conservative or aggressive the client wants to be with the investments that are earmarked for different purposes and phases of retirement.
Throughout this process, we keep the process and the discussions simple to help the client understand their entire situation and make sound decisions. We don’t overwhelm the client with everything going on behind the scenes, but we use powerful, targeted questions to draw out the information needed to develop a simple written plan of asset allocation that is easy to follow and understand.
Using all this information as a foundation allows an advisor to sit down with their clients and design a Bucket Plan that can meet or exceed their financial goals, all while staying within the client’s comfort zone for risk. The Bucket Plan can make it a win for everyone.