Designing a Retirement Asset Allocation Strategy Part II: Liquidity
How to Fill Your Second Bucket in Our ‘3 Bucket Safe Money Approach’
The following article features content adapted from the book Momma’s Secret Recipe for Retirement Success by Dan Ahmad, Jim Files, and Jack Canfield. Get your copy here!
We’ve said it before, and we’ll say it again: You need a comprehensive, written retirement income plan if you’re serious about your retirement security. Your plan needs to tie everything about your money together, which we recommend doing with what we call the “3 Bucket Safe Money Approach.”
We wrote about Bucket #1 here in our first installment of articles on this topic, and you’ll want to read it before you continue below. Bucket #1 is the first step in your planning – the one where you determine how much income you need for the rest of your life and allocate the necessary assets to this pot of money. Bucket #2, which we’ll discuss in this article, is the second step in your planning. This is where you determine how much liquidity you need and allocate assets to this second pot of money accordingly.
Visualizing the Three-Part Pie Chart
It’s helpful to visualize the “3 Buckets” as a pie chart; essentially, an asset allocation chart. We want you to imagine a pie that has three separate and distinct sections (buckets) that all act differently, but in concert with one another to help you meet your goals.
Again, for an in-depth discussion of Bucket #1, head here before you continue reading.
Filling Bucket #2
For Bucket #2, we have to determine how much liquidity is needed for your plan. This money you will typically put into the bank, credit union, money markets, CD’s, and T-Bills. Let’s review the reasons you need money in Bucket #2:
- Liquidity – You can access funds immediately.
- Safety – You will not lose any money if the stock market crashes.
- Fees – You typically don’t pay any fees to put your money in the bank.
- Freedom – You will feel more financially independent the more money you have in the bank because you will feel more comfortable spending it.
- Emergencies – None of us know when life might throw a curveball.
- Self-Reliance – You’ll have decreased need to borrow money in the future because you can pay for large purchases with cash.
Right now, if you are thinking that the banks all pay such low rates of return… you are correct. But we do not advise you to put money in the bank for you to get a high rate of return from those assets. We use the bank for liquidity, safety, and no fees.
Why Bucket #2 Matters
Let’s say you’re going to buy a car two years from now and it’s going to cost you $50,000. What if you don’t put the money in the bank, what if you keep the money in the stock market, and then the stock market goes down by -50%? What if you still have to buy that same car that’s going to cost $50,000? How much does that new car now cost you? It costs you $100,000.
What if you’re going to do a $100,000 home remodel two years from now, you keep the money in the stock market, and the stock market goes down by -50%. How much does that $100,000 remodel cost you? If you are good at math, you will say $200,000. While mathematically accurate, it’s not realistic. The remodel doesn’t cost you anything because you don’t do it. You’ve lost so much money, so you’re afraid to use the money to do the home remodel at that point.
We want to make sure you keep money liquid, and you continue to add money in the bank every single month so that you have money available to spend in the future. What if you saved money in the bank every month throughout your retirement, and every month your bank account balance got bigger and bigger, would you be terribly unhappy, or would you be blissfully peaceful and anxiety-free?
SEE ALSO: What is a ‘Safe’ Income Withdrawal Rate?
Why We Believe in the ‘3 Bucket Safe Money Approach
Some advisors may not advise you to put money in the bank because they don’t get paid to do that. We often advise clients to put money in the bank because it’s in their best interests. Your money has to work for you in different ways in retirement. By visualizing the pie chart and separating your money into the three buckets, you can ensure all your needs are covered, including your liquidity needs with Bucket #2.
We’ll be discussing Bucket #3 in a subsequent article, but if you want to learn more right now then check out our book, Momma’s Secret Recipe for Retirement Success. It’s full of the information you need to plan the secure retirement of your dreams.