The 3-bucket list: Needs, stability and growth

 

If money had a zodiac sign, it would probably be the water carrier Aquarius.

 

Think about it: Wall Street types often describe themselves as “liquid” while economists debate abstract theories like “trickle-down economics.” Hapless borrowers, meanwhile, are said to “drown” in debt; others barely keep their “head above water.”

 

Thatʼs why I like to think of retirement money as three buckets you can pour assets into and out of. Like Aquarius, a good sense of balance is key to success. What that really means is a continual rebalancing of assets between three containers (one for near-term needs, one for midterm stability and the last one—the enduring importance of which I mentioned in Part 1— Potential long-term growth). As you move closer to retirement it often makes sense to gradually reduce your vulnerability to market volatility—periodically pouring money from your “growth” bucket (equities) into your “stability” bucket (bonds, annuities).

 

What a lot of 403(b) participants often donʼt realize about this (re)balancing act is, it may continue well after youʼve received your last employer paycheck and your first Social Security check.

 

The bucket of “needs” (cash) is the one retirees tend to fret most about because it has a permanent leak—from which thereʼs a drip-drip of monthly bills, weekly groceries and everyday essentials. But when planning ahead for retirement, itʼs a mistake to think purely in terms of what youʼll need.

 

Needs are impossible to predict

Retirement income simulation can create a veritable complex puzzle of different permutations and scenarios, because of the many variables that contribute to it. While you can plug in some clear cut “knowns” (such as the principal youʼre starting out with), things like life expectancy and inflation rates are impossible to predict.

 

Some fundamental questions to ask:

  • How much do I think Iʼll need to spend annually in my retirement? Of course, many of your expenses arenʼt a matter of choice, healthcare for example. The costs of goods canʼt be predicted, either, depending on the rate of inflation, for one thing.
  • How many years will I be “spending down” (in other words, actually be retired)? This is obviously at best a fuzzy assumption, since life expectancy varies wildly from person to person.

 

Building wealth: A lifelong goal

When retirement advisors—of both the human and robotic kind—project your future income, another assumption he/she/it often makes is that of a passive retiree—someone who merely spends down her accumulated wealth. But an overnight shift from being wealth creator to consumer isnʼt exactly a desirable thing—especially when weʼve worked hard and followed frugal habits to amass that wealth in the first place. Thatʼs why an increasing number of seniors are volunteering or embarking on an encore career, or traveling to far away destinations across the globe.

 

Ultimately, the comforts of a cruise cannot soothe that wealth-building impulse weʼve embraced all our adult lives, nor is thinking about retirement solely in terms of having a single reservoir of cash from which to derive an income stream.

 

Bottom line: Creating and continuing to build a legacy can be a lifelong goal that continues well into retirement—one that benefits both you and your heirs*.

 

*Please note that no strategy can eliminate or anticipate all market risks and losses can occur.

 

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