The 3 Bucket Savings Strategy
The 3 Bucket Savings Strategy
The road to retirement may be filled with curves or potholes, having a plan to navigate the road ahead is vital. It may be hard to visualize the now becoming the future and how the two are so dependent on each other. I’ll explain it this way: there are 3 stages that we can breakdown our retirement funds into.
The stages are when we begin working, working throughout the years, and retirement. We can visualize by creating 3 contribution buckets and naming them #1 Taxable, #2 Tax Deferred, and #3 Retirement, and splitting up our contributions between all of them. Here is a breakdown of how this works:
Bucket #1: Taxable
In the beginning, so the first stage, we need to focus on developing good habits for saving money. Some simple examples could be to create a budget that works for you and sticking to it, or cutting back on eating out and buying things you don’t really need. This is also a stage where we are trying to build up our cash reserves as we enter adulthood.
We will also be experiencing the early years of being an adult meaning buying a first home, getting married, starting a family, or buying a car- something that creates debt for an extended period of time. When creating a budget, think of it as if you will be paying yourself with your savings in the future. In this stage the main goal is to build up cash reserves though dividends, interest, 1099’s, and other financial vehicles which generate current taxable income.
Bucket #2: Tax Deferred
Now we’re in our career phase, where we have consistent and reliable employment and we’ve already developed a budget. This is when you start noticing your good habits from the first stage really being put to use and paying off. In this stage there is about a twenty to thirty year window to build, build, build your savings and investments. Compounding the growth with deferred accounts (ESP’s) to save as much as you can, and utilizing things like IRA’s, 401(k)’s, NQ Annuities, and of course continuing to reduce debt as quickly as you are able to makes the process of boosting your savings significantly smoother. All of those options will create a lot of good savings to fall back on later in life.
Bucket #3: Retirement
Now your in the retirement stage, WooHoo! You are choosing to be “unemployed” and all of the money that you have saved over the years will be there to supplement Social Security and other income sources. Having money in tools such as Roth IRA’s, municipal bonds, and life insurance which create tax-free retirement income will be a big help.
In summary, there are many different sources to help create sustainable income, but it all starts with developing those good habits we talked about in the first stage. Using the buckets, we can visualize the need to think in three different steps when planning ahead for retirement and not just put all your money and investments in one place and call it good.
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