“You measure yourself by the people who measure themselves by you.” — Carter Chambers, as played by Morgan Freeman in the movie, “The Bucket List.”
Question: I am retiring at the end of the year and need advice on how to manage cash flow for the next phase of our lives. We’ve accumulated a comfortable nest egg and need guidance to efficiently withdraw funds.
Answer: Congratulations, you made it! The simplest way to approach the next chapter is to categorize financial needs and expenses in separate timeframes. An easy and convenient strategy we often use is to visualize a bucket strategy. Coincidentally, my husband and I were watching “The Bucket List” last weekend, and there are a few parallels to draw between the movie and financial planning. More on that later.
Buckets of Money
Everything begins with an analysis of cash flow. Even if you’re a multimillionaire, it’s useful to know how much it costs to support your lifestyle on a monthly basis. Some retirees are able to live on the earnings of their investment portfolios, but most need to design a plan and establish an efficient process to draw down principal over time.
A big challenge is that investments are subject to market volatility. By designating several pools of money, each pool, or “bucket,” is invested differently depending on when you’ll need the money, and each will have its own asset allocation.
Once the paycheck stops, a top priority will be to know that there is a safe source of funds to pay bills and cover unexpected expenses. Bucket number one is for money you can access easily without worrying about whether it will be there when you need it. The cash flow analysis provides an estimate of that monthly amount.
Next, you’ll want to decide how many months, or years, worth of expenses you’d like to have on hand, and place that total amount in the second “bucket,” which is your cash reserve. Safety is the priority for this money. It will likely be held in extremely conservative investments, such as bank certificates of deposit, Treasury bills, a money market fund or maybe even a short-term bond fund. You won’t earn much if any income, but you’re unlikely to suffer much loss either. Earnings aren’t the purpose of this bucket. Your circumstances will determine the investment mix and the number of years it’s designed to supply. For example, some people prefer to set aside two or three years of living expenses. The right answer is whatever is realistic and will provide you with peace of mind.
Refilling the Bucket
The third bucket is designed to produce income to replenish the first and second buckets, which will be drawn down over time. Bucket number three has a longer time horizon, which may allow you to take on somewhat more risk in pursuing the potential for higher returns. With interest rates at historic lows, you may need some combination of fixed-income investments, such as intermediate-term bonds or an income annuity, and other instruments that also offer income potential, such as dividend-paying stocks.
Because of the relatively short period, inflation will only have a limited impact on the first two buckets. Buckets three and four are there to address inflation and the higher costs of goods and services that it may cause over time. To compensate for inflation, you may need to take on somewhat more risk. The value of these buckets is likely to fluctuate more than the others, but since they have a longer time horizon, they may provide greater flexibility to adjust and adapt to any market surprises.
Going Back to the Well
The fourth bucket is intended to provide long-term growth to refill the first three buckets. Without a growth component, you risk shortening your nest egg’s life span. The longer your life expectancy, the more important it is to outpace inflation and plan for the unexpected. To fight the long-term effects of inflation, you’ll need investments that may experience price swings but also have the potential to increase the value of your overall portfolio. If you hope to leave an estate for your heirs, this bucket will help you provide those funds.
“The Bucket List,” starring Jack Nicholson and Morgan Freeman is a comedy-drama favorite of mine for several reasons. The movie speaks to love, friendship and living life to the fullest. Morgan Freeman portrays Carter Chambers, a blue-collar humanist in contrast to Jack Nicholson’s character, Edward Cole, a billionaire and a cynic.
As unlikely hospital roommates, the two terminally-ill men initially face their mortality in very different ways. Ultimately, their lives align in a meaningful way, allowing Carter to ask Edward, “Have you found joy in your life? Has your life brought joy to others?” My take away from this exchange is that money is essentially love in motion used to meet the needs of others and ourselves. Stay focused, invest and spend accordingly.
All investing involves risk, including the possible loss of some or all of your principle. This information is general in nature and is not a recommendation of any particular investment. There is no guarantee any particular investment strategy will be successful. Opinions expressed herein are those of the author and subject to change at any time.
“Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame design) in the U.S.”
This article provided by Darcie Guerin, CFP®, Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at (239)389-1041, email firstname.lastname@example.org Website: www.raymondjames.com/InvestmentInsights