How I Plan My Clients for Retirement with the "Bucket" Method
Simple Retirement Planning with Less Stress
Michelle explains the method behind her "Buckets" approach to spending money in retirement so you can be stress free! She shares actionable steps on how to position yourself to easily transition to retirement and ease your worry while you're there.
Time Stamps
00:00 Welcome to the Financial Planning Journey!
00:17 Demystifying Retirement Planning: A Personal Approach
01:19 The Basics of Retirement Planning: Understanding Your Needs
02:49 Introducing the Buckets of Money Strategy
07:14 Breaking Down the Buckets: A Step-by-Step Guide
11:55 Addressing Common Concerns and Questions
16:46 The Power of Immediate Annuities in Retirement Planning
19:06 Why This Strategy? Simplicity and Peace of Mind
19:34 Closing Thoughts and Invitation for Feedback
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Welcome to the Financial Planning Podcast
Hello everyone and welcome to the me financial podcast. I am Michelle Moses your host I am a certified financial planner a realtor and a former e commerce store owner and today.
The Unique Approach to Retirement Planning
It's just gonna be me I don't have a guest we are going to be talking about exactly how I plan for retirement I am really excited to share this with you guys.
I feel like this is where The biggest light bulbs go on for my clients, um, and that I feel like I am the most help, uh, I, I would say this is like where I really shine because it is just like, I like life changing for some of these people that come to me the way that I plan this. Um, because I'm always about like keeping it simple so that people understand what's going on.
And my clients love it. And I hope that you do too, because this is just one strategy of how you can plan for retirement. And what I mean for that is, [00:01:00] I'm not talking about, um, Um, getting there and how to save, I'm talking about like when you're ready to retire, how do you break up your money so that you know that you aren't spending too much and that you're covering your monthly expenses?
Okay, so this is what we're going to be going over. the whole, um, projecting what you need for retirement. That is a whole nother scenario. Okay. Cause in, in, in this podcast today, I'm going to be using, um, some round numbers, uh, just so that you can understand it because I, uh, am going to first, This is the first time I'm ever going to attempt doing it just verbally, um, without some paper and then obviously not catered to just whatever a person's scenario is.
Uh, so I hope that this translates well.
Understanding Retirement Needs and Calculations
Uh, but if you don't know how much you even need in retirement, that is a retirement calculator that you need. You need to figure out how much you need a month, like how much do you [00:02:00] spend a month. And that's where the retirement calculator comes in. And then that will tell you, Oh yeah, you're on track to, you know, retire at age 65.
Um, and so what I'm going to, what I'm going to be sharing today is, okay, you have this lump of, you have this sum and this big lump of money. What do I do with it? Like, how do I know what to pull from where first? Like, do I pull it from this IRA or do I pull it from, sell this house first? Uh, so we're going to kind of talk about that and I am so excited to share this with you.
Uh, just. Because I always, that's why I started this podcast is so that I can get some of this information out to people. I want you to know everything that I, you know, all these years of things. Um, I think it's a shame that it's just in my head and I can only help so many people. So I hope I can help a lot of people with all of this.
Introducing the Buckets of Money Strategy
Uh, so again, there are a lot of ways to plan for retirement. I just really like this one. Um, and it is, um, I do basically what's called like buckets of money. And so it's splitting your money [00:03:00] into different, um, buckets. And I did originally read the, my God, a long time ago, a book called Buckets of Money by Ray Lucia.
Uh, and in his book, he has like all of these, um, numbers and charts and things, you know, based upon the years that you're going to and how much you think you're going to earn. Uh, I'm just going to use some down and dirty numbers. Today, um, obviously these can change and it really makes me, honestly, it makes me really nervous to share some numbers with you because, uh, when you get into the numbers, that's when people, I feel like challenge you the most.
And that's what I'm most scared of is, you know, I'll say, Hey, knock off 3%. And it's like, why would you do that? That's a terrible rate of return. And, you know, it's like the. You could argue to the ends of the earth about what is going to get a better return and how you should invest your money. I mean, it's like everybody's got an opinion about how you should do that.
So, that's why I hesitate with quoting real numbers. So, [00:04:00] yeah, so I'm gonna use some numbers today and hopefully they work and you don't get super offended by them. So anyway, um, first what you were going to do to get ready for retirement is you're going to add up everything that you have. Okay. Because sometimes people are going to be having social security coming in.
So you need to get yourself a social security statement and decide on where is your, what, when are you going to retire? And some people do wait until, you know, social security is at the max. Some people can't stand it and they want to retire early. I would say most of my people, they wait until the full retirement age, um, because it's just kind of worked out that way.
Um, and so we're going to go with full retirement age for this scenario. And then there might be some other things. You might have a rental property, you might have a pension from the state. If you're like a teacher or you work for the state. Uh, you might have a pension from, you know, maybe you work for Ford Motor Company and you've got like awesome benefits.
Um, so there are still [00:05:00] pensions out there, or if you've like got a loan that you gave to somebody, whatever, add up all of the money that you have coming in when you retire. Okay, because that is going to be subtracted from whatever your monthly budget is, because that's the other number that you need, is that you need to figure out how much you need a year or every month.
It's usually easier for people to say, this is how much I need per month, and then we extrapolate that out per year, uh, and then you subtract out. All of the income that you just added up. So you've got your social security, you may have some rental properties. You might have a spouse with social security and you're doing this jointly.
Uh, you know, there's all, uh, I've seen all kinds of things. Um, you want to. And then you add all that income up and figure out how much that is either a year or per month and then figure out how much you need either per year or per month. Okay, so what I'm going to do is I'm going to use a scenario that you [00:06:00] spend, um, 5, 000 a month and we're doing this and I know that a lot of people don't spend it, so don't.
Don't get all, uh, upset that, Oh my God, I spend 10, 000. I'm just doing this for sake of ease. Okay. So let's say that you spend 5, 000 a month. And so security is 1, 500 a month. That means you have a need of 3, 500 a month. And that's where you're trying to get to when you're doing retirement planning is how much do I need to actually pull out of my assets?
Right? You've got all this other stuff coming in. What is, what's the gap? What is the gap that you're trying to fill here? So, if you're living on 5, 000 a month, and you have Social Security of 1, 500, that leaves a deficit of 3, 500 a month, and that's what you're going to have to take out of your retirement.
Okay. So we're going to multiply that times 12 and that is 42, 000 a year. So you need 42, 000 a year to live off of your assets. Can you make that happen is the [00:07:00] question, right? Um, and so what we're going to do is we're going to say, um, that you have a million dollars saved up. And again, I'm using round numbers.
So don't. Come at me like I ran all of this and you're crazy.
Breaking Down the Buckets: Allocation and Strategy
So, uh, , you got $42,000 a year, and so what we're going to do with your million dollars is we're going to split it into three buckets, okay? Bucket number one is the first five years of your retirement. Bucket number two is the next five years of your retirement.
And bucket number three is the rest of your retirement, 10 years and over. And the reason that we do that, so picture that, okay. So you've got bucket number one is short term five years. Bucket number two is the next five years and bucket number three, how we split your money is going to be your long term money.
And so the idea and the overall arching idea of this is that you've got these different buckets so that you can invest [00:08:00] them differently so that bucket number three that you don't need for 10 years, you can invest that in the stock market and not care if it goes up and down because you know you have 10 years of money in the first two buckets.
And I cannot tell you the relief that people feel when I tell them this, because when people come in, they imagine that they've got this million dollars, they have to invest it in one account, and then, okay, well, do we do a balance 60 40, or do we do 70 30, and what if it goes down, and oh my god, I mean, how am I ever going to know if I've got enough, I mean, you know how that goes, and should I take out 3%, and is that going to have to change, because it's, Times have changed.
Okay. We're not just taking out 3 percent of a million dollars anymore. Um, it's not really, it's kind of been proven that that's not a good strategy. Uh, and so, but I like to do it this way because I don't even want to, as a planner, I don't want to worry about it. Honestly. I mean, I, I [00:09:00] don't, I don't want to be up at late and late at night worrying like, Oh my God, is Joan, you know, going to have enough money to live for the rest of her life?
I don't know. Oh my goodness. Um, and so I like to split it up like this, whereas the only worry that I have is once bucket number two, you know, like we might be four years into retirement and so they're four years into bucket number one. Right? So that means we have one year left on bucket number one, and we still have five years of money on bucket number two.
So we have six years of money left. And so is it a good time to then, you know, this is the, the only thing I need to worry about is when is it a good time to replenish these buckets? Because when I want to replenish it is when the market is high, when things are going well, um, like if you have a lot of real estate, we might want to sell a house.
You know, and then replenish. So I've got some people, they've got some investable assets, but then they also have rental houses. When is a good time to do that? And, and. The way that we make decisions now is when are we going to be filling these buckets, um, [00:10:00] because, you know, they're three or four years into this one, and we want to make sure, you know, if there's going to be maybe a market downturn, maybe we should replenish all of that so that we don't have to worry about it, and that is it.
Your number one goal with your money is how can you plan it without worrying about it? And that is the whole reason that I do this. So let's back up. We have bucket number one that's going to have five years of money in it, right? And so you said that you, you got 5, 000 or we said 5, 000 that you needed as income and 1, 500 of social security.
And that means you got 3, 500 deficit. So that's 42, 000 a year. So to get to five years at 42, 000 a year, I'm going to multiply that times five, which is 210, 000. Okay. So I need to take 210, 000 and put it in bucket number one. I don't take exactly that amount just because you're going to earn a little bit of money on that.
And so I'm going to [00:11:00] take 210, 000. And what I do is I subtract 3 percent from it. Okay, I'm very conservative. You could subtract 5 percent and say you're going to make 5 percent in five years, um, but I For the sake of just talking about things we're gonna do 3 percent because we're gonna keep it easy Okay, so that's like two hundred and four thousand dollars.
All right, so that is your bucket number one So remember you had a million dollars and we're gonna subtract two hundred and four thousand dollars from it Okay, so we've got like 7. 97 left or 7. 96 left, and um, then we're going to have to do bucket number two.
Addressing Inflation and Adjusting Buckets Over Time
So this is where people get confused because then you've got inflation.
And so what I do is we just say, okay, you're going to go from 5, 000 to 5, 500 a month because you have inflation because you want to, uh, live your life while you can. Some people want to increase it even more. Um, side note of if, if you do [00:12:00] have the assets, you know, do increase it because if you can enjoy your money in your seventies, do it, because by the time, you know, you're kind of usually in your eighties or late eighties, you start to have some health problems and things like that.
Uh, it's, It's, you know, enjoy your money while you can. That's definitely one of my lessons from just doing this job, but, um, so bucket number two, we're going to give you a raise and say you're 5, 500 a month. And let's say your social security goes up to 1600. So you got 3, 900 a month of a deficit. And so all of that adds up to 234, 000.
You can take 234, 000. And go try to make money with it and go put it in some bonds. Uh, you're, what you're doing is you want to invest this for five years, right? You're going to need this money in five years. You do not want to put it all in the stock market. I don't recommend if you don't have at least seven years, I would not put your money in the stock market.
So bucket number two has 234, 000 in it. And you are going to go [00:13:00] invest this, um, in bonds and maybe a little bit of stock, but not much. Honestly, most retirees say, let's just do the bonds. Let's do the sure thing. I just want the 5%. I'm like, okay, fine. When you get retired, I feel like people don't want to take the risk.
They just want to know that they don't have to worry about their money. That's it. And so it's, it doesn't become this game of let me play, you know, let me make the most, um, most of the time these people retire and they're just like, I just don't want to worry about it. You know, I just want to know that I'm okay.
The Importance of Stress-Free Retirement Planning
So by this way, I know that bucket number one and number two, they're taken care of for 10 years. Okay. So we've got 204 and then we got 234. Okay. And we're going to subtract that from, from the million. And then you invest all the rest of it. Like you do as if you were not retired and that's really it, you guys.
I mean, I'm giving you the high level numbers of it and there's, you know, we could get into some things of, [00:14:00] different investments that could make differences, but I'm trying to just get you the idea that this is a retirement strategy that could get you so that you don't have to worry about whether the market is going up and down.
And I feel like that is what people mostly worry about. So the biggest worry when we divide this up into bucket number one, two, and three, again, is. As I said is just making sure that we have enough when the market is up and down and we're paying attention to things. Um, and so I really like that, that's my worry, rather than, you know, oh my gosh, this whole account just went down and we have to make up 10% and, you know, however much, uh, and however many years.
And that becomes an issue because then you're, you know, you're chasing returns and then you tend to make, uh, bad investment decisions. Um, good investment decisions come from like security and knowing, you know, just, you don't have to make the money, but you're hoping that it works. Uh, and so when you start to chase this, um, [00:15:00] you know, I have to make money, I have to make money.
Um, the stress of it, I just don't think it's worth it. So I like to split it up into these three buckets. And And I also kind of pad the second bucket just because what if some medical stuff comes up, what if, you know, and it's not like, we're not padding it a ton, but you know, there was, we went from 5, 000 to 5, 500 a month, and then the total amount was 234, 000.
Well, I'm not taking that down from whatever we're going to earn. I'm actually leaving it at that because if there's extra in there and then they need it, I mean, what if they have to buy a new car or have a new AC put on there or a new roof or, you know, there's a lot of things that pop up. I don't want them to stress.
I don't want my clients to be stressing about, I can't do these things. I've got to drive my car for so long. You work so hard and to save all of this money, and it's not so that you can then retire and feel like you can't spend [00:16:00] anything. Um, and I know that I work with people that have money, you know, I'm not talking, you know, there's a whole subset of people that don't have enough save for retirement.
This is not the podcast for them. This is a podcast for people that have been saving that want to have a good retirement and that you're just not sure how to break it up. And, um, this is how I do it. And I feel like it's. It's very simple. Uh, and so then people can understand it. And as I said, then, you know, like I'm like 15 years into retirement when some of these people, and, you know, we're still talking about, okay, though this account is bucket number one.
Okay. Now this is bucket number two. Uh, and it's, It's refreshing that those stories, you know, I explain this in five minutes and then we're still talking about it 15 years later.
Annuities and Bonds: Securing the First Two Buckets
Um, and the other thing, um, about bucket number one is, um, a lot of times I give people the option because I'm not huge into annuities and the only time I ever sell annuities is bucket number one because people want an immediate annuity.
And what that [00:17:00] is, is that you give the insurance company your money. And then they immediately pay it out, you know, the next month or within six months. Uh, and so you're not leaving it in there to grow. You are basically giving it to them so that they're giving you a guaranteed, um, payment. And they are, um, they have a contract to pay you that for, and we do five years, to pay you that for five years.
Um, and so they will give you, so when I do these immediate annuities, it might not be, so, but we had. And then the bucket we said was number one was 204, 000 when I go and I get the quote for this annuity. It might be okay. It's not 204. You need 202 and blah, blah, blah, blah. Some change to get to that five years.
Okay, great. But these numbers that I did are just good for, um, getting the generalization. And then when you start to get the products that you actually want to put it in, then they might change. Um, but a lot of my clients love immediate annuities for number one and then number two, we [00:18:00] just put it in bonds.
Uh, if you were to read Ray Lucia's book, it would say number two would be in like a mix of stocks and bonds. But most of my clients, um, they would just, they just want to keep it safe. So 10 years of money is just You know, and like a laddered bond strategy, which is what I was mentioning, the one year, two year, three year, um, bonds.
Uh, they just keep it.
Investing with Confidence in the Third Bucket
That's the annuity and the bonds and then the 10 year money is where they can invest and they can get their head around that because you have been investing for the long term for your whole life. And so they totally understand bucket number three. They're like, okay, fine. And then they can have fun and we can do, um, stocks.
We can invest in alternative investments that are usually five to seven years. They can do real estate, you know, 10 years is a long enough time that they can invest the way that they were before. And they are comfortable with that. And we've shaved off the money that we need. Um, so that they're comfortable in retirement, and then they know that bucket number three is something [00:19:00] that they can just invest the way that they always have.
Uh, so I love this strategy.
Why This Strategy Works: Simplicity and Security
I have read a lot of other different strategies over the years, and I just like this because it's simple. It isn't, um, a very, you know, all this Excel spreadsheet, you You know, there's a lot of other really complicated ways that you could do it, which is totally fine if that's the way your brain works.
Uh, but a lot of people that come to me, they're not the numbers engineer people. They're the people that need me to help them. Uh, and so this is how I set it up. So I hope this helps. I really hope that I explained this in a way that you can understand it, uh, over a podcast. Um, and maybe I'll do some visuals.
If you think some visuals would help, please comment and I will do like a total video with some visuals on it.
Closing Thoughts and Invitation for Feedback
Um, and thank you for listening. Um, please leave a review or give me any questions and be sure to subscribe and tell your friends. I appreciate you listening, you [00:20:00] guys.
Disclaimer: The information provided in this podcast is for general informational purposes only and should not be construed as professional financial advice. Always consult with a qualified financial advisor or professional before making any financial decisions. The hosts and guests of this podcast are not responsible for any actions taken based on the information presented.