I met with a man recently in his early sixties who’s looking to retire within the next six months. As we started talking about the Three-Bucket Strategy and how it fits into his retirement income plan, the question came up: how much should I have in each one of the buckets? If you don’t know about Three-Bucket Strategy yet, stop reading now and watch this video. Then come back here for my conversation with this client and what we decided to do with his three buckets.

First Step: Creating an Income Plan

If you’ve seen my previous videos, then you may remember that there’s a certain order in creating your ideal retirement plan. Before we can create the investment plan and decide how much of each asset class going to go into each one of the buckets, we must first create the income plan.

The income plan is a visual representation that allows us to see what impact any financial decision has on the life of the total retirement plan. It’s a very useful step in creating more confidence in your financial life. For example, if you wanted to spend a little bit more money traveling early on in the first few years of retirement, we would be able to see that the total retirement plan amount does go down a little bit, but it’s not harming the plan as a whole. Or maybe you’re going to have part-time income in retirement; seeing how that affects your total amount is going to help us decide what to do moving forward. We can really look at all different sorts of scenarios. Sometimes we talk about the four economic seasons and what sort of impact they might have on the ideal plan.

Once we have the income plan, we start looking at what investment plan is best suited to achieve the goals of the income plan.

Start with Ideal Income Amount

My new friend, who I mentioned at the beginning of this post, had done some preliminary work in trying to figure out how much should go into each one of the buckets. First, he figured out what his ideal income would be coming into the bank when he was retired. That amount was $20,000 per month.

And now as a quick note, don’t let the numbers throw you off. We’re all in different positions and we’re all planning for our unique lives. We don’t need to compare to other people. Some people have more, and some people have less. This person that I was talking to is a giver. He’s also supporting charities, and he wants to travel a lot the first few years of retirement. So, I’ll use his numbers here, but don’t let it impact your mindset as you’re planning your retirement.

This client wanted enough in his Conservative Bucket for at least five years’ worth of withdrawals. He’s going to have about $5,000 coming in from his and his wife’s Social Security. So, he estimated withdrawing $15,000 from his investments in various accounts each month. Then he did the math of $15,000 times 12 months, then times 5 years to equate $900,000. ($15,000 x 12) x 5 = $900,000

Plan for Different Scenarios

Based on this math, he asked if this means he should have $900,000 cash in his Conservative Bucket. His logic seems reasonable and it makes sense, but the total investments he had across the board was $6 million. This means that if he followed that plan, he was thinking he’d have an allocation mix of about 15 percent conservative assets and 85 percent more aggressive assets.

We looked at his income plan, and then modeled out what a portfolio would do in these upcoming years. We considered both the good and the bad scenarios. Then, we had a conversation about his own feelings of risk around retirement. We also considered the least amount of risk that we need to take on order to have a successful retirement plan. Based on these factors, we ended up lowering the return assumptions and updated his income plan. We also added some asset classes that he did not previously have in his total allocation. Finally, we found that an allocation with a lower risk number than his first assumption was better suited for him. So, to keep it simple, he ended up closer to a mix of 65/35 conservative to aggressive. There are many asset classes within that mix, so he’s prepared for all the potential economic seasons that we may head into.

Process of Planning

If you’re like many of our clients who are close to, or already in, retirement, you might have the feeling that you’d like to take on no more risk than what you need in order for your plan to be successful. And as you can see from this post, creating your ideal retirement plan is really a process of discovery. Once you create the plan, it’s not over because a retirement plan isn’t necessarily that valuable. Life changes tomorrow; the economy changes, the markets change. It’s really the process of planning that’s the valuable thing.

An exercise to try today could be to pick out a monthly income number that you’d like to have coming into the bank in retirement. Then choose the numbers of years of safety you’d like to have in your Conservative Bucket. Go back to the formula I shared earlier of (Monthly Income x 12) x Years to see how much you need to have saved. Sometimes we look at the average Bear Market and make sure we can last from peak to trough and back to peak again––that’s one way people do it––and then work backwards to see what your total allocation would be. When you look at that allocation, think about if you’re comfortable with the risk, or does something have to change. This is a good way to start thinking about your own process of planning.