Do You Have a Plan for Withdrawing Your Savings in Retirement? Let's Talk Bucket Strategy

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Hi, everyone. Welcome to the retirement workshop. My name is Warren Burger. I'm the founder of Luminary Financial Advisors. And, , this is a weekly workshop that we do to talk about financial topics. I tend to work with people that are within 10 years of retirement. So, , generally this is going to be more timely for people that are in that situation. I think it's a valuable information for anyone. So I'm glad that you could join me. And, , let's talk about today's subject and, , we're going to talk about how to withdraw your retirement savings. Once you reach retirement. And more specifically, we're going to really drill down into a bucket strategy in doing that. So, , hopefully this is going to be valuable information. We try to do this every week and, , and, , on a different financial topic.

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And hopefully it's something that really provides for your financial wellness as well. , on that subject, I really just have to start out with a disclaimer that basically says, , this isn't designed to be advice for investment or accounting or legal advice. It's really just a platform for education. Hopefully there's something here that you can take away, , and go back to your financial advisor or your CPA or your attorney. And if you think it's something that applies to your situation, you know, run it by them, see if it works for you individually. So with that said, let's get on with the show here. , when we first start talking about, , retirement withdrawal strategies in our portfolio, I think it's really important for us to really, , first understand what we're talking about, , when it comes to what's actually in the portfolio and the function of each of these asset classes in the portfolio.

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So, , sorry. I have a little technical malfunction here. Okay. So, , the first, , really I'm going to focus on, , the three main asset categories, which are stocks, bonds, and cash, and see, , what role they play in your portfolio. And once we have an understanding of that, we'll move on to sort of the next phase. So stocks in your portfolio, and you might see stocks as mutual funds, , electronically traded funds or individual stocks. , the role that they play in your portfolio is as a growth component in your portfolio. So we're looking to have that compound over time. , it's where you're going to expect to see the greatest amount of gains. , but also you're going to see the greatest amount of risk and volatility. So the risk is actually the risk that the asset itself might lose value over time.

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And the volatility is really the concept that of markets moving higher and lower and how often they do that. So when we talk about the ups and the downs of the markets, what really talking about is volatility. And so with that increased that we see in that portion of your portfolio, we see increased risk and we see increased volatility. They go hand in hand, and it's why it makes it a slightly riskier, , asset category to have when you're looking at short term goals, because we don't know how the market's going to move in the short term. And so we can't, , if we're in a situation where we can't afford to have losses in the short term, we're really going to try to move away from stocks in that scenario, but it's a really important part of your portfolio to make sure that that grows over time, even in retirement.

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So, , the next portion is, , bonds. So bonds are really where the stability is provided in your portfolio. There they're less volatile than stocks. So you're going to tend to see less movement up a higher or lower, , less stress sort of in, in, in, in terms of that as an asset category. , but also you're going to see more modest returns because of that decreased risk. And so risk reward is always a balance where there's more reward, there's always more risk and vice versa. , and so what we tend to do is we, as we get closer, , , different than what we have in the equity portion of the stock portion of our portfolio, as we get closer to a goal like retirement, we're generally gonna want to increase our holdings of bonds against stocks, , because we have that stability, we still have some modest growth, , but you know, certainly as we get into retirement, we want to take on generally, we want to take on less risk and we want to make sure that we're trying to maintain what we already have.

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So that brings us to cash. Now, cash is the safest portion of our portfolio, , that can be savings accounts, checking accounts, CDs, treasury bills, , money market accounts. And for the most part, they're definitely considered the safest, , very little chance of losing money in this asset category. , but the one thing that we have to be cognizant of is the effect of inflation on cash. And so if we have a portfolio that's too conservative, where w we're we're too loaded up on cash, what we'll find is that inflation starts to take a bite out of that cash portion where cash isn't doesn't have the same value things start to cost more. So the value of those dollars are, are, are, are decreasing over time. So we, so having getting too conservative and too safe, and a portfolio eliminates the ability to grow that portfolio and keep, keep pace with inflation over time.

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So now that we've talked about these asset categories that are in your portfolio, it's, , it's important. , the next part of this conversation has to be about the asset allocation. So the asset allocation involves dividing and investment in the portfolio among those asset categories. So essentially we look at that in percentage terms. So we might have a more aggressive portfolio that has 80% stocks and, , combination of 20% of, of cash and bonds. A more conservative portfolio might have, , the ex, you know, might have a 60%, , investment in stocks and 40% in bonds and cash. So we're increasing that, , the level of, , the, the amount of bonds in the portfolio decreasing the amount of that growth factor and risk factor. That's in the stocks as we move closer to retirement and our, our tolerance for risk gets a little bit lower.

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And that's the thing about the asset allocation. It's a really personal decision that everyone has to make, because it's really based primarily on two main factors, and that is your tolerance for risk. And we all have a different view on risk that we have in our lives. Some of us are super conservative. Some people like to roll the dice, , but that's going to be an individual consideration. And then we also have to look at the time horizon. So when are we going to need that money? And we have to, and then we have to take that, that risk and that time horizon combine it into sort of, what's going to make you personally feel most comfortable, , with the asset allocation in the amount of risk you're taking on, but it also has to be applied to what are your needs going to be, and how much of a return, how much growth are you going to need in your portfolio to live the life that you want to live in retirement? And so that's, that's a whole nother discussion, but it is it's important, , to, to understand what the asset allocation patient is.

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So now we've looked at what's in the portfolio, are stocks, bonds, and our cash, and now we've, and then we've looked at what the allocation is. So we're gonna, you know, we, we've made a decision about the percentages of, of stocks we're going to have in a portfolio, bonds cash. We know that that's probably going to change over time as our risk tolerance changes and our time horizon changes. So how do we look at a strategy for withdrawing that money? Once we get into retirement, you've saved into your 401k for all of these years, you want to have the most effective way of taking that money out while still ensuring that you're going to have it lasts throughout your entire, your, your, your retirement. So that's where we come to the topic of the day, or excuse me, the topic of the day. And that is this bucket strategy.

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So the bucket strategy is, is looking at each one of these asset categories as its own separate bucket. So we have a cash bucket. We have a bond bucket, we have a stock bucket or an equity bucket. We have safety, we have that sort of moderate thing in the middle, and we have the growth on the end. Now, what we would look to do is first figure out what your anticipated spending is going to be in retirement. And now that's not going to be perfect for everyone. You're going to have up years and down years, but, but, but in order to plan, you need to create some sort of a baseline. And so what you're going to look at is, , what, what do you to spend in any given year? And you're going to try to anticipate that spending, and then you're going to subtract anything like a pension or social security that you're going to be getting what's left is going to be the amount of cash you're going to need out of your portfolio to sustain your retirement needs.

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And so what we want to try to do is, , put two years, I, I like two years of cash. One to two years is fine. , but two years of cash would be set aside and that's going to be your retirement paycheck. So, you know, some people like to get it every two weeks, like they used to, you know, when they were working, , some people like to get it monthly. Whatever's most comfortable for you. The idea is that we're going to ensure that we have an anticipated amount of two years worth of cash. Now, in addition to that, , most people that I've worked with, like to keep an emergency fund as well. So a certain amount of cash, that's just always going to be there for unanticipated expenses. , and I think that that's a really smart way to go. , but, , but in this one, bucket is going to be just your general expenses, okay.

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The next bucket, which goes from three to seven years out, and that's, you know, it's highly a personal decision as to how long you want each of these buckets to last, that's going to hold your, your, your bonds. So I have individual bonds in this slide, but that could be individual bonds, , mutual bond, mutual funds, electronically traded funds, anything that holds the, , the promise that we had when we talked about bonds, being a more stable asset category, , that has modest growth, , but is going to be less susceptible to the volatility, the ups and downs of the market. And so we're going to have three to seven years of anticipated expenses in that bucket. And then from seven years on an anticipated expenses, that's where everything else is going to go. And that's the growth portion of your, , your, your, your portfolio.

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And that is going to where you're going to have all of your growth stocks, dividend stocks, mutual funds, things like that. And so, , what you're going to do is keep replenishing. So, so that, that, that cash bucket will be constantly getting depleted because that's where you're taking your money for your day-to-day living out. And one of the, , a couple of ways that you're going to keep putting money back into that cash bucket is by taking some of the growth aspects of the buckets. N ber two, and n ber three, and you're going to continually sweep those into that first bucket. So, bonds achieve growth through the interest rate payments on bonds. So when you get interest on those bonds, that would get swept into your cash bucket, , for the stock bucket, you get dividends, but plus you'll have growth in up years in the markets, and you can take that and sweep it as necessary into that bucket one.

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So, you're continually, , , , , filling up that, that bucket n ber one, so that your one to two years of cash is always in play there. Now you might ask, but why do I need this bucket strategy to begin with? And that is in the event that we get a downmarket. So this all works great. As long as we have markets in the last 10 years, we've had, you know, pretty much except for a few exceptions, , markets that have been continually, , moving upward in a, in a bull market fashion. , but we know that that's not going to last forever. So what happens with this bucket strategy in a downmarket or recession? So that's where the beauty of this comes in. And, and that bucket, that, that one to two years of cash is really an, , an insulation against the downmarket, so that we don't find ourselves having to sell stocks from our growth bucket and bucket n ber three.

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, we don't have to sell stocks at a loss in a downmarket because we can actually lean on that bucket. N ber one for up to two years while we wait for markets to come back. So if you have a recession and we see two years of a down market and the markets have been horrible, and the news is bad, and everybody's fretting about what's happening with their portfolios in the market, you can be comfortable knowing that, Hey, I'm leaning on, I'm continually taking cash out of this bucket, , and not having to touch my growth stocks, because I'm going to want to have those grow when we get back to a bull market. And so you can deplete a bit of that bucket. N ber one, even getting into bucket. N ber two, if you have to, because we know we have three to seven years of that, more, , stable, moderate, , money that's available.

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And so ultimately, , you find yourself in a situation where you're seeing the news. CNBC is making everyone crazy. You don't have to react to that. And when I look at financial planning, there's the math of it, but there's also the emotion of it. And people, , they get emotional about their money, especially in retirement, because you have so much riding on the performance of your portfolio, that sometimes they can make emotional decisions, , based on the, the stimulus that's going on around them. And that can lead to selling stock in a downmarket because you start to panic while the rest of the market panics around you. And in a moment, I'm going to show you a slide that it illustrates, , where, where that can be a mistake. And so having a bucket strategy like this in place, , can make you feel as though you're a little bit insulated from the day-to-day happenings in the market. And now you're always going to have to adjust and make movements on this, depending on what's happening in the markets, but really you can count on that two year period and beyond to be able to withstand a recessionary environment. So I just want to illustrate, , here with this next slide,

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This slide is the

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History of bull and bear markets in the United States from 1926 to 2019. And it's really going to illustrate the point of why it's so valuable to have that cash component. And, and, and also to ensure that you're not going to touch your growth aspects. So if you look at the top side of this chart, the blue, , graphs, those are the bull markets, and it shows not only the, , percentage terms that the, the bull markets grew, but also the duration of the bull markets. And if you see on that graph bull markets not only went much higher, , when we weren't a bull market in terms of percentage terms of growth, but they lasted longer. And if you compare that to the bottom side of this chart, which is the bear markets, you'll see that actually, except for a few exceptions, a couple of exceptions, , two years was pretty much the max that you would see a bear market occur.

(15:33):

There's a couple couple there that are 2.1 years. , if you go back to 1928 and 29, it was a, a bit over two years, but it, you know, that two year cash bucket covers most of what we've seen throughout the history since 1926, at least, , of how long, , bear markets lasted. And so, , what happens is we, and if you can withstand that bear market by using your cash up during that time, you see what happens at the end of that bear market. The bull market starts to come into play the growth of those assets, , , really, , , pivots to a much higher, , , , , a much higher percentage of returns. And so by not touching those growth assets during those downtimes, you're setting yourself up for success when the markets do start to come back. So that's really the, , the bucket system explained.

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I think that gets the point across, , in terms of, , you know, what the strategy might be and how it might be valuable for you. , there's a n ber of different strategies that are out there. , we'll probably talk about some of those in the future. I just find that this particular strategy is a good way of, , of achieving the results that you need to have in your portfolio in retirement while, , while allowing you to have a relatively stress free view of the market from a day-to-day basis, which I think as you get into retirement becomes more and more important because nobody, nobody wants to be stressed out when you're supposed to be, you know, out playing golf or out on a beach. So, , hopefully this has been helpful for you. , I just wanted to let you know that if, , if any of you do need, , assistance in creating a retirement plan or a social security strategy or retirement distribution or tax mitigation strategy, , we're here to help.

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We offer a complimentary introductory call to talk about financial problems or questions people might have, and, , ultimately see if, , if we're a fit to work with you in the future, or if not, , make sure that you're at least headed in the right direction. I always like people to come away with more information, , in any interaction with me then than when they walked in. So, , I have included a link to my personal calendar Let's Talk in the comment section, feel free to that, to set up a complimentary, , , conversation. And, , I'm not seeing any questions at the moment. , but if you do happen to catch this on a recording, feel free to pop a question into the comments and I will go back and try to answer them as I can. So, , thanks for joining me today. I hope to see you next week and have a great day.