hey guys what's up I'm Ain and welcome back to the channel when it comes to retirement once we get to that point we generally have two competing money goals one is to be able to fund the life we want today and the other is to be able to preserve and grow your wealth over time and I say these are competing goals because one involves you withdrawing and spending money but then the other is involving making sure you have money for down the road and one of my favorite retirement planning strategies that tackles these two competing goals is the three bucket method now admittedly I have actually done a video on this topic in the past and it was actually one of my most favorite topics to date that video was actually done when my channel was very young back when all my videos were simply filmed on my iPhone so there was no fancy camera there was no microphone so while I loved the content of the video the production quality is somewhat subpar so I feel like I need to revise that video and that's exactly what this one is for beyond that rather than just cover ing the three bucket strategy which is a tool used to fund and preserve and grow your wealth during your retirement years but more than just going over what these buckets are an important piece of the equation is how to refill these buckets as you use the funds in them and that is going to be the very next video that I post so I'm kind of doing this as a two-part series when it comes to the three bucket strategy for retirement the buckets are really built around time frames as in when you might likely need this money I like to default to calling these the now soon and later buckets but to be a little bit more descriptive it might be better to refer to these buckets as the cash bucket the income bucket and the growth bucket and let's take a bit of a dive into each of these buckets specifically to see what their primary purpose is when it comes to the cash bucket or your now bucket you're going to want to have anywhere from 1 to two years worth of expenses here now the whole goal of this bucket is Safety and Security it is to make sure that you can fully fund your needs and cover all of your living expenses so ideally the money in this cash bucket would be sitting in a very safe and secure location that might be a high yield savings account or a money market account or t bills the expected rate of return on the money in this bucket is our current interest environment which is presently around 4 to 5% now in the most General sense you could think of this as your current fund and your emergency fund when you get to your golden years when you're in your working years we often talk about an emergency fund of say 3 to 6 months of expens but once you retire once you stop earning that regular paycheck you need to build a buffer into this the goal here is to have greater stability and greater security so any expenses you would need to cover within the next 2 years you would have at the ready in this account this would be everything from day to-day living expenses to things like any vacations you have planned or any major home repairs you have coming up and everything in between so this fund really goes well beyond an emergency fund it's really important to put an emphasis on stability with this bucket and with this fund this fund is not meant to be invested the market has far too many fluctuations in the short term it is far too volatile you need this money there and at the ready whenever you need it it's important to keep in mind that while the current rate of return on the funds in this bucket might be between 4 and 5% truly this is going to be more reflective of the present Market rates presently we find ourselves in a bit of a higher interest rate environment if and when inflation does get under control we'll notice that the these interest rates will Trend downwards while they will also Trend downwards at the same time on these cash L accounts historically speaking these near-term rates of return on these cash like accounts has been lower but the whole goal of this bucket is not necessarily to have the greatest return it's to have security to have money that you can count on in the near term it's also important to keep in mind when you're trying to figure out how much you need in your cash bucket that you consider any guaranteed streams of income this might be a pension this might be Social Security because any of these guaranteed streams of income are actually going to decrease the amount that you would need in your cash bucket and we'll cover this in an example next we have the income bucket otherwise known as your soon bucket covering expenses for say the next 3 to 7 years now being that this bucket has a little bit of a longer time Horizon here's where you can invest a little bit on a more conservative basis maybe at this point you put this money into laded CDs with various maturity dates maybe you take advantage of bonds or REITs or depending on your overall risk tolerance you could invest into dividend focused stocks or dividend paying funds laded CDs are going to be more on the conservative side of the spectrum whereas if you're investing in dividend paying stocks or funds that's going to be more on the aggressive side of the spectrum and whichever strategy or whichever asset mix is best for you really depends on your individual circumstance being that these dollars are invested on a more conservative basis meaning capturing more than a simple cash-like account you can anticipate a slightly higher rate of return historically that might have been more in the range of 6% and again we're in a higher interest rate environment right now so you might be able to find Returns on your cash-like accounts for those cash buckets that are actually fairly competitive with what you might find for your income bucket now the whole goal of money that's in this income bucket is to provide a level of stability but also still provide some growth potential because when it comes to your cash accounts that money is not set in that bu with the intent to grow over time that is your cushion to cover your bills to cover your life expenses that is money that's ready at a moment's notice when we talk about the income bucket that's not necessarily money that's ready at a moment's notice it can be more conservatively invested to hopefully capture a higher return for example the money in this account might be locked up in a CD and if you lock it up in a CD you might be able to get higher Returns on your funds so the money in this bucket can get invested but not invested in a way that it's subject to extreme swings of the market it's invested a little bit more conservatively there's a little bit of stability built in it's not totally at the whim of the market because in the short term we all know the stock market can be incredibly volatile and finally we have the growth bucket or the later bucket these are the funds that you're not going to need for eight years or more so this money has a longtime Horizon this is money that you can put to work and keep invested perhaps you utilize more aggressive growth Investments think index funds growth funds ETFs funds that are aiming not only to preserve your wealth but to grow your wealth over time the target rate of return in this category is going to be 8% or more think along the lines of long-term rates of return on the stock market itself just because you reach retirement does not mean your investing days are behind you you could easily have another 10 20 or 30 years to fund so that means you have to put your money to work you need to be taking advantage of inves modalities that still beat inflation and that's exactly what this bucket is for long term the market goes up in the short term the market can be incredibly volatile and likely this bucket will see its share of volatility but the good news is the market is up far more often than it is down there has never been a single 20year period where the stock market has produced a negative return and importantly to keep in mind there are only two occasions where the market has had a negative return over a rolling 10-year period one of those being during the Great Depression the other during the Great Recession of 2008 so the moral of the story is if you stay invested for long enough the odds are overwhelmingly in your favor that your investments will have a positive return let's run an example of how these buckets might be funded if we have a married couple looking to retire and utilize this strategy here are the assumptions we're going to make both of the partners in this marriage are at full retirement age and both are collecting Social Security one spouse collects a social security check of 15 $100 a month which is in line with the average social security check the other spouse collects 50% of the primary spouse's benefit or simply the spouse will benefit in this case that would be $750 a month we will also assume that this couple has a $1.2 million portfolio combined finally we will assume that they have a Target income need of $60,000 a year in retirement so under these assumptions what would their three-bucket strategy look like we'll start with the cash bucket and when figuring out how much cash you need to keep on hand it's important to keep in mind that you should consider any guaranteed income streams you have in this case we will consider this couple's Social Security benefits but if you're in a situation where you have a pension you would consider that here as well in this case our retirees get $27,000 a year from Social Security so with a desired annual income of $60,000 that means they would have a gap of $33,000 a year to fill after accounting for Social Security so in order to have a fully funded cash bucket of 2 years they would need to have $66,000 in this cash bucket again this money does not need to be sitting in a checking account ready to spend it can easily be put into a high yield savings account or a money market account as long as it's readily accessible next up in their income bucket we want to aim for 7 years worth of expenses in this case that's $231,000 and for these funds if your risk tolerance runs on the conservative side of the spectrum maybe better directed towards say laded CDs if you're a bit more aggressive with your risk tolerance maybe you incorporate Blue Chip stocks and this isn't an All or Nothing approach you very well may fall somewhere in between on the Spectrum and build a portfolio that incorporates both of these that fits your risk tolerance now remember this couple has a $1.2 million portfolio so if $66,000 is in their cash bucket and $231,000 is in their income bucket that leaves just over $900,000 for their growth bucket and these funds would be spread out among long-term Investments think ETFs index funds or mutual funds whatever is your preferred long-term investing modality as you can see the vast majority of this couple's portfolio actually remains invested hopefully growing their wealth over time and increasing their purchasing power over time allowing them to sustain themselves for the next 10 20 30 years of retirement but in taking advantage of funding different buckets you create stability for today knowing that you have cash that you can rely on regardless of how the market performs and with those long-term funds invested you're also guaranteeing that you will have the ability to fund your tomorrow and remember as with any retirement approach it's best to tailor it to your personal situation none of these are hard and fast rules you don't have to have exactly two years worth of expenses in your cash bucket maybe you're more comfortable with one year in your cash bucket maybe you're more comfortable with three when it comes to your income bu maybe you don't want 7 years worth of expenses maybe you want eight or nine there's give play with all of these rules they're not rules they're better seen as general guidelines make sure to tailor those guidelines to fit your situation in order to make it work best for you now the biggest question that comes out of the three bucket strategy is how do you replenish these buckets is it a question of timing and frequency and which buckets are used to replenish which other buckets all of these are wonderful questions and I'm going to address that in the very next video that I post if that video is already out by the time you're watching this video I'll make sure to link it above and down below are you planning on utilizing a three bucket strategy in retirement if you are leave your thoughts in a comment down below if you're not share your thoughts as well I post new videos every single week if you got anything at all out of this one please give it a like if you're new here please consider subscribing or if you know of someone who might get something out of this type of content please consider sharing I'll see you soon bye [Music]