Monday, April 27, 2015

What's In Your Retirement Plan? The Four Buckets Strategy

We’ve all seen the popular Capital One credit card commercials that always end with the same question: “What’s in your wallet?”  In the same way, I like to ask an equally important question: “What’s in your retirement plan?”

When considering this question, I’m reminded of a conversation I recently had with a couple who came to our office.  They asked if they could simply retain us and pay us by the hour, as opposed to having us manage their investments.  They went on to explain that the reason they didn’t want us to manage their investments was because they wanted to maintain the ability to pull their money out at any given time. 

When I asked what they meant by pulling out of the market, they said that it comes down to having peace of mind.  Simply stated, they wanted to have the comfort of knowing that they could retrieve all of their money, wherever it was invested.  Upon further conversation, what I discovered was that they didn’t really want the ability to pull their money out; rather, what they actually wanted was emergency money.  They wanted to be absolutely sure that if an emergency arises, they will have the funds to cover it.

While it’s true that we can’t predict all future emergencies and their costs, we can use a strategy called “The Four Buckets” to segment our money.  

The first bucket in The Four Bucket strategy is your defined benefit or your guaranteed income for life.  Examples of this bucket include: Social Security, company pension and custom pension.  The second bucket represents your risky money.  This bucket is associated with volatility of the principal, possible growth, and a long-term time frame of five years or more.  Examples of risky money include: equity markets, individual stocks and real estate.  The third bucket represents your safe money.  This bucket is associated with safety of the principal, yet limited access of your money.  Examples of safe money include: fixed annuities, government bonds, and safety of principal and interest/gains.  Finally, the last bucket is your rainy day/emergency fund.  This bucket is 100 percent safe and easily accessible.  An example of this bucket is your checking or savings account.  With a rainy day fund built into your financial plan, you can have peace of mind moving forward.

I explained to the couple that most people want to have income for the rest of their lives to cover expenses like groceries, medical costs, health insurance and living, while also keeping up with inflation.  All the while, they also want to have some form of liquidity, or emergency money.  That is why we developed The Four Buckets strategy and the rainy day fund.

In the same way that a carpenter has many tools that work together to construct the final product, your financial plan should have many different kinds of investments or products that play different roles and are used strategically.  Just as there isn’t one perfect tool for the carpenter, there isn’t one perfect investment for the financial planner.  Rather, a good plan will display a coordination of many different investments working together for the client.

After explaining The Four Buckets, we often hear clients comment on the simplicity of the strategy and how they have never heard it explained that way before.  By following The Four Buckets, retirement truly has become plain and simple.

For more topics like this, check out our radio show “Retirement Plain and Simple” every Saturday morning at 8 on WNPV 1440 AM and like us on Facebook!

If we at Kemp Harvest Financial Group can help you in any way with regard to your financial planning needs, please feel free to contact us.

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Author: Mark Kemp, President and CEO, CFP®, AIF®

Mark Kemp is the founder of Kemp Harvest Financial Group and has over twenty-five years of experience in the financial services industry.  Mark is a CERTIFIED FINANCIAL PLANNER professional, completing the program in Financial Planning at the New York University School of Continuing and Professional Studies in Finance, Law and Taxation.  Mark holds FINRA Series 6, 7, 24 and 63 licenses.  Mark enjoys using his knowledge and experience to educate and help his clients identify their financial goals.