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There is a lot of focus in my business on the size of a nest egg that someone needs to be able to retire.  While that is an important number to know, knowing what to do with those funds once you accumulate them is equally important.  The retirement funds that you have saved need to serve a purpose in your plan, and Trilogy breaks down a retirement income plan into three different partitions that we think of as “buckets”.

  1. Fixed: The first bucket is for your fixed income.   Many people will have Social Security or a pension to get them started in the fixed bucket, but they may need to use some assets as well in order to get a sufficient amount of income every month.  You want to make sure there is enough income flowing in to cover your base lifestyle.  Think about all of the things you would do in a normal week that does not include travel or other non-recurring spending.  Each client’s need is going to be different, so the bucket won’t be filled the same way across the board.  There may be income producing assets like bonds or dividend paying stocks, or a person may want more guarantees than that and use some form of an annuity*.
  2. Freedom: Next we want to make sure to set aside some funds into a more conservative and accessible account for the non-recurring things that come up.  Some of these expenses may be used for fun things like a vacation or a trip to visit family.  Other expenses may be less fun, like a broken down car or health issue.  Either way, we want to make sure that we set aside some funds that are not very risky to access in the case that you want or need to use them. 
  3. Finish Well: The third bucket is the most overlooked.  Most people think that they need low risk, income producing investments alone while in retirement because they can’t take the risk.  The problem is that not taking on the market risk can create exposure to other risks like inflation.  So far, the assets and income we have mentioned will most likely not keep up or exceed the rate of inflation. The third bucket is designed to maintain your quality of life whether it is long and healthy, or if you get sick along the way and need care.  The investments in the finish well bucket could be in any number of things, many people would use a balanced approach that can beat inflation over the long term.  These funds should reduce risk over time as you get closer to needing them.  By the time you are withdrawing the funds, the investments should be very conservative, much like the freedom bucket above or cash. 

The bucket strategy is not the same for everyone.  Some people have more in the fixed bucket due to income requirements or risk aversion.  Some like to keep more of their funds liquid for the “just-in-case” moments in life.  These buckets can be filled in any number of ways, but the important thing to note is that the money you have worked hard for and saved your whole life has a purpose that goes beyond just retirement, and it is allocated to match that purpose.

 

 
*In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.

*While many securities aim to provide stable dividends, dividend payments are dependent on various factors such as market conditions and are not guaranteed. It also may be discontinued or modified at any time. 

*Guarantees of an annuity contract are contingent on the claims-paying ability of the issuing insurance company.
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