The Retirement Bucket Most Plans Forget

A retirement plan is rarely one large pile of money.

Instead, most plans contain several different “buckets,” with each bucket responsible for a different job.

One bucket pays today’s bills. Another provides stability. Another remains invested for future growth. There may also be separate buckets for healthcare, travel, taxes, emergencies and leaving something behind for the next generation.

The goal is not simply to accumulate the largest possible balance.

The goal is to make sure the right money is available at the right time.

Retirement Buckets

• The Cash Bucket. The cash bucket covers near-term spending. It might include checking accounts, savings accounts, money market funds, short-term CDs or Treasury bills.

  
  

  Many traditional bucket strategies recommend keeping one to two years of expected portfolio withdrawals in cash.

• The Stability Bucket. The stability bucket is typically designed for money that may be needed over the next several years. It might include bonds, CDs, Treasury securities, and other conservative investments

  
  

  The job of the stability bucket is to provide greater consistency than the stock market while helping refill the cash bucket over time. For example, when the cash bucket begins running low, maturing CDs, bond interest, or selected investment sales can be used to replenish it.

• The Growth Bucket. The growth bucket is intended for money that may not be needed for many years. It often includes stocks, ETF’s, and other growth-oriented investments. This bucket helps the retirement plan keep pace with inflation and supports a retirement that could last 20, 30 or even 40 years.

  
  

  Because the retiree has cash and more conservative assets available for current needs, the growth bucket may have more time to recover when markets decline.

That is the theory, anyway.

Markets have a habit of ignoring our carefully prepared diagrams.

Tax Buckets

Retirement accounts can also be divided by how withdrawals are taxed.

• Taxable money. This may include bank accounts, CDs, and brokerage accounts. Interest, dividends, and realized investment gains may create taxable income.

• Tax-deferred money. This includes traditional IRAs, 401(k)’s, and 403(b)’s. Taxes are generally deferred until money is withdrawn.

• Potentially tax-free money. This may include Roth IRAs, Roth 401(k)’s, and qualified withdrawals from health savings accounts.

Having money in different tax buckets can give retirees more control over where their cash comes from each year. For example, a retiree may avoid taking an additional taxable IRA withdrawal by using cash or Roth funds instead. That flexibility can help manage taxable income, Medicare premiums, and the taxation of Social Security.

Purpose Buckets

Some buckets are organized around a specific goal rather than an investment. A retiree might have separate money reserved for:

• Healthcare and long-term care

• Travel and lifestyle

• Home repairs

• Family emergencies

• Charitable giving

• Leaving an inheritance

These buckets can provide clarity, but they can also create a problem.

What happens when one bucket gets low or runs dry? What happens when the market falls just as a major expense appears? What happens when the cost of care is larger than expected? That is where another resource may deserve a place in the conversation.

The Home Equity Bucket: The Swiss Army Knife of Buckets.

Unlike a single-purpose bucket, home equity can function like a Swiss Army knife, ready to serve different needs as they arise, from cash flow and healthcare costs to market downturns, major expenses, and legacy planning.

For many retirees, home equity is one of their largest financial assets. Yet it is often missing from the retirement plan. The house appears on the net-worth statement, but the equity is treated as though it must remain untouched until the home is eventually sold.

A reverse mortgage loan can allow an eligible homeowner to turn a portion of that equity into a financial resource through a line of credit, monthly advances, a lump sum or a combination of options. Reverse mortgage proceeds are generally considered loan proceeds rather than taxable income.

This does not mean home equity should automatically be spent. It means it should be considered and potentially available to support the other buckets when needed.

• Supporting the cash bucket. A reverse mortgage loan could provide funds for monthly expenses or eliminate an existing required principal-and-interest mortgage payment, improving household cash flow.

• Protecting the growth bucket. During a significant market decline, home equity could provide an alternative source of funds rather than forcing the retiree to sell investments at temporarily depressed values.

• Supporting the healthcare bucket. Available proceeds could help pay for home modifications, in-home care, medical expenses, or a period of private-pay long-term care.

• Supporting the lifestyle bucket. Home equity might help fund travel, family experiences, or other retirement goals without requiring a large withdrawal from an investment account.

• Supporting the tax strategy. Because reverse mortgage advances are generally loan proceeds rather than income, they may provide cash without creating the same taxable income as a Traditional IRA distribution. The tax consequences of the overall strategy should still be reviewed with a qualified tax professional.

• Supporting the legacy bucket. Using home equity may reduce the equity ultimately remaining in the property. However, it could also allow other investments to remain invested longer or prevent those assets from being sold during an unfavorable market.

Legacy planning is not simply about protecting the house. Legacy planning is about deciding which assets should be used, which should be preserved, and what kind of legacy the homeowner truly wants to leave.

One Bucket With Several Possible Jobs

A reverse mortgage loan is not the right solution for every homeowner. It is a loan, interest and charges accrue, and the homeowner must continue meeting the loan obligations, including paying property taxes, maintaining homeowners insurance and maintaining the home.

But for the right homeowner, it may be one of the most flexible buckets in the retirement plan.

It does not have to be labeled exclusively for living expenses, healthcare, emergencies, taxes or market downturns. It can potentially support all of them.

The important question is not, “Should I spend my home equity?” A better question is, “Would having access to home equity give the rest of my retirement plan more flexibility, protection, and breathing room?”

That is a conversation worth having before one of the other buckets runs empty.

Create Options Before You Need Answers

The best time to learn how a reverse mortgage loan truly works is before you realize you might need one.

I regularly host educational seminars that explain the facts, address the common misconceptions, and show how home equity can fit into a broader retirement plan. There is no pressure and no obligation. Just an opportunity to learn something new and understand the options available to you.

Join me at an upcoming seminar and learn how this financial tool works while you still have the time, flexibility, and freedom to decide whether it belongs in your retirement plan.

https://www.largerlegacy.com/event-list