Your Retirement Savings
How Much Money Should be in Your 'Cash Bucket'?
Thinking about your retirement savings and investing for retirement? You should consider putting some of your retirement savings into your 'Cash Bucket'.
Your 'Cash Bucket' is the first and most important of your three 'Buckets of Money' when it comes to investing for retirement. But it's often the most overlooked.
If you've never heard of 'Buckets of Money' - then you might find it helpful to visit our page explaining your three 'Buckets of Money' first.
Let's take a closer look at your 'Cash Bucket', what it means for your federal retirement, and how much of your retirement savings should be in it.
What is Your Cash Bucket?
Your Cash Bucket is where you keep retirement savings that will cover your month-to-month living expenses.
When we talk about Cash here - we're not talking about paper money. We're referring to money in a checking account, a savings account, a money market account, a cash equivalent, etc.
Money in your Cash Bucket must meet three requirements:
- You can access the money at any time you want
- You don't have to sell an investment to get access to it
- You can get access to it without incurring taxes or penalties
Many people make the mistake of underestimating the importance of the Cash Bucket - when in reality, it is the most important of your three 'Buckets of Money'.
Your Cash Bucket:
Most Important - Most Overlooked
Of the three 'Buckets of Money' - your Cash Bucket serves as the foundation, but it's often the most overlooked.
The real strength of 'Buckets of Money' comes when you have all three Buckets working together. But it all starts with your Cash Bucket.
Without a solid and well-funded Cash Bucket, your choices are limited in your Income Bucket and that affects the choices you can make in your Growth Bucket.
But most Federal Employees approach retirement savings from the *opposite* direction.
Most federal employees approach their investing for retirement from the opposite direction. They start with the Growth, then maybe look at the Income, and rarely focus enough on Cash.
But in reality, this sets them up for a very difficult spot.
When you *start* your retirement income planning with Growth - you may end up shooting yourself in the foot.
Even if you found a fabulous Growth investment - what happens when you don't have enough money to make ends meet each month?
You might be forced to sell out of that great Growth investment at the wrong time just to cover your living expenses.
So Growth and Income are certainly important, but they can only really reach their full potential for you when you have a solid Cash Bucket as a foundation.
How Much Money Do You Need in Your Cash Bucket?
The amount of retirement savings you need in your Cash Bucket will change at different times during your retirement.
You’ll need more right when you retire, and for most people the amount they need in their Cash Bucket will gradually decrease as all of their sources of fixed income start coming in.
When you retire, (are you sitting down?) ideally you’ll have 12 - 24 months of your living expenses in cash.
At retirement, ideally you should have 12 to 24 months of living expenses in your Cash Bucket.
So if you are planning on living on $5,000/month in retirement - shoot to have between 12 x $5,000 = $60,000 and 24 x $5,000 = $120,000 in money in your Cash Bucket when you retire.
As your fixed income sources start coming in (and they probably won't all start at the same time) - you can transition your Cash Bucket to have between 12 and 24 months of your 'gap' at that time.
The Four Phases of Your Cash Bucket
You've probably thought about your fixed income in retirement. But have you ever drawn out your own income timeline?
Many Federal Employees know that their fixed income probably won't start all at the same time - but very few have ever thought through what this means to their retirement savings.
Most Federal Employees will have their fixed income start, stop and change as they go through retirement. As it changes, your Cash Bucket needs also change.
As your fixed income starts and changes in retirement, the amount of retirement savings you need in your Cash Bucket Changes too.
For most FERS, their Cash Bucket will go through four different 'phases' - and each phase means that you need a different amount in your Cash Bucket.
Can Your Cash Bucket be in Your TSP?
Many Federal Employees have questions about 'where' the best place to keep their Cash Bucket is.
For example, does your Cash Bucket money have to be in a savings account? Could it be in your IRA or in your TSP?
Find out more about why you might not want to have your Cash Bucket money in an IRA or your TSP.
Cash Bucket Gives You Choices
One of the primary reasons you want a well-funded Cash Bucket is to cover the time when your paycheck stops, and the unknown amount of time before your retirement checks start.
But another important role of retirement savings in your Cash Bucket is to give you choices and control when it comes to your Income Bucket and Growth Bucket.
When you have a well-funded Cash Bucket - you won't be ‘forced’ to sell an investment when it’s down just because you need the money that month. Having retirement savings in cash allows you to make better investment decisions because it gives you greater choice when it comes to choosing when to sell which investments.
If certain investments in your Growth Bucket are performing well, you can choose to sell them at a profit.
But what if some of your Growth investments are down? If you expect them to go back up in the future - having plenty of retirement savings in your Cash Bucket gives you the opportunity to let those investments ride without being 'forced' to sell them in a down market just because you need the money to pay your bills.
You need to make the best decision for your personal situation.
But I can tell you from experience, there have been numerous times where having a well-funded Cash Bucket has saved a client's bacon.
Again - your Growth and Income Buckets are important too - in fact, all three buckets must be working together - but without a solid Cash Bucket, you just can't reach the full potential of your retirement savings.
Have You Ever Thought of Your Retirement Savings This Way?
When I'm talking with my clients and I explain the concept of the Cash Bucket and Buckets of Money - most have never thought about their retirement savings this way.
Many people are so caught up with the details of investing for retirement - that they had never stepped back to look at the big picture. When they year it, the concept makes sense to them, it's just something they've never thought of before.
Have you ever thought about your retirement savings this way?
If this is a new concept to you, but it makes sense, what else might you be missing?
If you've never thought about your retirement savings this way, what else might you be missing?
Planning your federal retirement is a complex process. There are so many moving parts and pieces that it can be difficult to keep track of it all at times.
And it's important to remember that decisions you make in one area of your life can impact other areas that you may not have thought of.
Over the years as a financial planner for Federal Employees, I've had the privilege to help my Federal Employee clients through the entire retirement process.
I've also been fortunate in teaching CSRS and FERS Retirement classes to have talked with people from all different situations.
Even though everyone is unique - I've seen the same mistakes made over and over again. I sincerely enjoy helping my clients - but I wanted to find a way to help even more Federal Employees avoid the mistakes I've seen others making.
That's why I've taken my experience as a financial planner for Federal Employees, and created a do-it-yourself program for FERS Federal Employees.