The Three-Bucket Retirement Savings Plan


Saving for a comfortable retirement is notoriously difficult. Retirement savers want to make good retirement plans, but they face uncertainty about their own future and plenty of market risks. Nobody knows exactly how long he or she might live, how much food, fuel, and housing will cost in several years, or exactly what their own financial needs might be. In addition, the value of investments in real estate, stocks, or anything else might fluctuate in the future as they have done in the past. The task of figuring out how to account for all of this might seem overwhelming to many people.

Coping With Retirement With the Three-Bucket Plan

Many financial advisers try to cope with this uncertainty by suggesting the use of three distinct pools of money. Some call this the three-bucket retirement plan. This briefly describes these three kinds of savings:

  • Immediate savings: Of course, retirees need money to pay bills and enjoy their lives right away. This type of savings should sit in a fairly liquid and safe place. Examples of this kind of savings might be a regular savings or checking account or an accessible money market fund.
  • Emergency and near-future savings: This is the fund that is meant for unexpected expenses and money that will be needed for bills in the future. Examples of unexpected expenses could include a medical bill or the cost of replacing a furnace. Also, this fund should be able to replace the immediate savings after that money gets depleted. This money should go into a conservative investment that is still fairly accessible. An income annuity might be a good solution.
  • Savings for later: With money in the other two savings buckets, folks can bask in the security of knowing they have money for their immediate bills and most unexpected expenses. That leaves them free to invest some money more aggressively or in a way that’s less liquid to let it grow for the future. If it’s never needed, it can be left to heirs.

What types of investments should go into the “later” bucket? Some folks buy a deferred annuity that will mature by the time they might need it in the future. Others simply use the equity in their homes because they plan on downsizing by the time they have exhausted their other resources. They might either sell the house or get a reverse mortgage to provide them with extra income. Others might simply keep investing in stocks, bonds, or other financial products. There are many ways to save for the future that should be explored.

Planning for Retirement Can be Simple

Nobody really knows what the future will hold. That’s what makes retirement planning difficult. With a strategy that accounts for immediate, near-future, and long-term income needs, making sensible retirement plans can become a lot simpler and more effective.