When saving for retirement, many mistakes stem from how people view their investments. Each portion of your money should have a specific purpose. Without these distinctions, you may be more prone to making emotional decisions that put your financial security at risk.

One popular solution is what we call the ‘3-bucket strategy’. This method divides your assets into separate groups: a bucket for safety, one for income, and one for growth. Another way to look at these buckets is by time horizon: money for your short-term, medium-term, and long-term goals.

Before we dive into the details, let’s first explore the philosophy behind this approach.

The Purpose of the Bucket Strategy

The 3-bucket approach isn’t just about managing your money; it’s about managing life events. These buckets will help you position your money for both security and opportunity. Knowing the purpose of your money can help you create more predictable income and navigate retirement with confidence.

• Bucket #1: Safety: Keeping a portion of your money in safe assets helps shield it from market exposure or unexpected government actions. This might include cash in the bank, a guaranteed insurance product, or a money market fund.
• Bucket #2: Income: Retirement is all about generating a consistent, dependable stream of income. This second bucket contains money specifically earmarked to provide steady cash flow. That may be through interest, dividends, or other retirement income sources.
• Bucket #3: Growth: The purpose of your growth-oriented money is to protect against inflation. Keeping all your money in “safe” investments earning 3-4% may leave you falling behind. At the same time, you don’t want all your money exposed to market fluctuations.

The goal of the 3-bucket strategy is to strike the right balance between safe money, income, and growth-focused investments. Another way to approach your money in retirement is to organize it based on when you’ll need it.

• Short-Term (0-2 years): Set aside the money you’ll need within the next two years in safe accounts that protect your principal. Your short-term goals might include buying a vacation home or paying for a grandchild’s education. This bucket could also pay for your day-to-day needs.
• Medium-Term (3-7 years): When you’re saving for medium-term needs, safety of principal isn’t as much of a priority. However, you still want to avoid taking on too much risk that you face a significant loss.
• Long-Term (8+ years): You can invest your long-term funds more aggressively since you have more time before you’ll need them. With short- and medium-term money in place, you can let your long-term investments grow without worry.

Avoiding Emotional Decisions

The biggest risk you face in retirement isn’t a market decline; it’s your own behavior. In our experience working with pre-retirees and retirees, fear often takes over when markets fall. A solid financial plan can protect you not only from market downturns but also from emotional decision-making.

As your needs change, your allocations may shift. But whether you use the safe, income, growth method or the short-term, medium-term, long-term approach, the goal stays the same. The bottom line is when you have the confidence to stay on track toward your long-term objectives, you can avoid emotional mistakes.

Key Takeaways

• Shift your investment mindset in retirement
• Assign a specific purpose to each portion of your money
• Work with a financial advisor who specializes in retirement planning

At Johnson Brunetti, we can help you create a solid plan for retirement. Our financial advisors have helped guide thousands of families through the retirement planning process. This gives us a unique perspective and opportunity to offer wisdom from our own experiences with clients.

When you reach certain points in retirement, it’s not just about money. Important decisions arise, surprises happen, and sometimes family issues create challenges that can feel overwhelming. While we can’t solve every problem, we can walk with you through it and help you make informed decisions along the way.