Investing for Retirement

Learn about ‘Buckets of Money’

When you’re investing for retirement, it’s easy to get caught up in all of the details.  Most federal employees make investment decisions on an account-by-account basis. But is that really the best idea? Before you get caught up in making specific investment choices – you need to take a step back and look at the big picture.

Looking at the Big Picture First

Before you can make good choices for each of your accounts, it’s important to look at your big picture of investing. When I talk with my clients, before we ever talk about specific investments for retirement – we look at the money in their retirement accounts and categorize it into ‘Buckets of Money’. Almost every time I help clients with this, it’s an ‘ah-ha’ moment.  It makes sense to them, they just never really thought about investing for retirement this way. I’d like to share with you this idea of ‘Buckets of Money’, and offer some ideas of how you can apply it to your personal situation.  But to be clear – we’re just talking about general concepts of investing for retirement, and not about any specific investment.  Everyone’s financial situation is unique – you need to make the best choices for your personal situation.

Your Three ‘Buckets of Money’

Instead of starting with specific investments – start by looking at your retirement money as if it were in three different Buckets. Let’s take a quick look at the three Buckets…

• Cash Bucket:  This is where you’ll be drawing the money you need each month to live in retirement.
• Growth Bucket:  This is where we focus on growth of investments and ‘inflation-proofing’ for the long-haul.
• Income Bucket:  This Bucket is focused on preservation.  This is typically home to investments geared towards providing income with lower risk.

I would encourage you to approach the ‘Buckets of Money’ concept by looking first at how the Buckets work, and what they can do for you. For right now, don’t worry about trying to ‘back into’ how much you currently have in each Bucket by categorizing your current investments.  Because the way your money is currently invested may not be ideal, once you fully understand how the ‘Buckets of Money’ concept works. Once you feel comfortable with the ‘Buckets of Money’ idea – you’ll be in a much better position when it comes to investing for retirement.

Understanding the Buckets

Each Bucket has different characteristics, and each Bucket serves you in a different way.  As we go along, you’ll also see how each Bucket works best when all of your Buckets are working together. Let’s take a closer look at each Bucket, and see what it can do for you…

#1)  Your Cash Bucket

Money in your Cash Bucket provides for your month-to-month living expenses in retirement. To be clear, when we’re talking about ‘cash’ – we’re not talking about paper money – we’re talking about money in a checking account, savings account, money market, cash equivalent, etc. Your Cash Bucket is focused on distribution.  You need to be able to get access to the money quickly and easily, and without risk to principal.   There are some important considerations about money in your Cash Bucket. Money in your Cash Bucket needs to 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 underestimate the importance of the Cash Bucket – or underestimate how much they really need in their Cash Bucket.   When really – having a well-funded Cash Bucket provides you greater choices in your Income and Growth Buckets.  Having a solid Cash Bucket serves as the foundation for your other Buckets of Money.  This will become more clear as we look at the other buckets.  So the next bucket is…

#2) Your Growth Bucket

Money in your Growth Bucket is where you invest for growth and it’s invested in a way that will help your overall portfolio out-pace inflation. Some people may not need to take as much risk and go after a higher rate of return in their Growth Buckets as other people. It all depends on your goals and your financial situation. But just because money is in the Growth Bucket doesn’t mean you throw caution to the wind.   Money in your Growth Bucket should:

• Be money you don’t intend to need (the principal) in the next 5 years or more
• Be invested in a way that only takes as much risk as you ‘need’ to take (
• Be invested to help your overall portfolio out-pace inflation

And that brings us to the third Bucket…

#3) Your Income Bucket

Money in your Income Bucket is focused on preservation and providing income.  There are some important considerations about money in your Income Bucket. Money in your Income Bucket should:

• Be invested in something low risk
• Provide a regular income (either monthly, quarterly, semi-annually, etc.)
• Be invested in a way that protects principal

Depending on the investments you’ve chosen, income may be coming in at different intervals – monthly, quarterly, semi-annually, etc.

The Three Buckets Working Together

The only time the real strength of the ‘Buckets of Money’ idea can be realized is when you have all three Buckets working together.  Each one provides more power to the next – giving you more choices and options when you’re investing for retirement. You might be able to find an investment that pays a higher rate or return in your Income Bucket, but that only brings in income (perhaps in the form of dividends, interest, etc.) on a semi-annual basis.   If you have a properly-funded Cash Bucket – you have the cash to live month-to-month, and you can afford to ‘wait’ for the semi-annual income to replenish your Cash Bucket.   Whereas if you didn’t have a well-funded Cash Bucket, you might be forced to look at Income Bucket choices that paid more frequently, but that might pay a lower return.   Your Growth Bucket and Income Bucket are reinforced by each other and a solid Cash Bucket. Let’s say you had investments in your Growth Bucket that were affected by a down market.  If you believe those investments will go back up in the future – having a solid Income Bucket and a solid Cash Bucket will allow you the flexibility to ride it out in your Growth Bucket until a recovery. But if you didn’t have a well-structured Income Bucket (or you didn’t have an Income Bucket at all) – you might be forced to sell off that down investment in your Growth Bucket just to have money to provide for your lifestyle. There are so many variations, and everyone’s personal situation is unique.  But having all three Buckets working together gives you the most choices and puts you in control.

Cash Bucket as the Foundation

While all three Buckets need to be working together – having a well-funded Cash Bucket serves as the foundation for your Buckets of Money. Many people underestimate the importance of the Cash Bucket.  And a poorly-funded Cash Bucket is the source of many problems when it comes to investing for retirement.

But Most Federal Employees Approach Investing for Retirement from the Opposite Direction

But when I talk to most federal employees, they approach investing for retirement in the opposite way. They are heavily focused on growth investments – and have usually not thought much about having a cushion of cash for retirement. Having good growth investments can be wonderful – but if you don’t have a cushion of cash to provide for your month to month living expenses in retirement, you may be forced to sell out of that wonderful growth investment in a down market in order to pay your bills – which means you missed out on the real potential of that growth investment. So while the Growth Bucket often gets the most attention – it can’t reach its true potential for your retirement unless it’s well supported by a solid Cash Bucket and Income Bucket. When you have a well-thought out trio of Buckets of Money – you have more choices when it comes to investing for retirement.

Have You Ever Thought of Investments This Way?

Most Federal Employees have never thought of investing for retirement in this way. They’ve been so caught up in the details of each account (and often overwhelmed by the details) that they haven’t taken the time to look at their bigger picture. As a financial planner for Federal Employees, I’ve had the privilege to help individual Federal Employees through the entire retirement process. While each client is unique, I find that many people are missing steps in their retirement planning.  It’s not that they’re not smart – they’re very intelligent, it’s just that investing for retirement is not what they do for a living.

Federal Employees Have Unique Financial Planning Needs

As a Federal Employee, you have unique needs when it comes to financial planning and investing for retirement. Your federal benefits are important and complex, but they are also just one piece of your overall financial puzzle. It’s important to approach your federal benefits from a financial planning perspective.  Unfortunately, it can be difficult to find good information that helps you understand your benefits and how they fit into your financial picture. While you can probably find lots of information about your federal benefits online – it’s usually not written from a financial planning perspective.  You can learn about your benefits, but there’s little information on how your benefit choices might impact other areas of your financial life. And while there is plenty of information online about financial planning – Federal Employees really do have unique financial planning needs that most generic financial planning doesn’t address.  And in the worst case – some advice that is good for ‘most people’ can actually be *bad* for Federal Employees.   That’s why I’ve taken my experience as a financial planner for Federal Employees and created a do-it-yourself program called FERS Route to Retirement.