Making the Final Preparations for a Comfortable Retirement

Steven Zeller |

As a person draws nearer to the time of retirement, confirming that one has the required capital to do so and properly segregating and structuring those asset dollars is vitally important. If a person has been disciplined and focused for several years, he or she has accumulated enough investment assets to generate the required income supplement to accommodate their retirement lifestyle.

Saving funds through various tools such as 401k's, IRA's, Roth IRA's, savings, etc., may reach a level that the person is confident, or is ready to determine, that they have reached that critical mass to finally make the transition into a retirement lifestyle. The bigger challenge is that nowadays, the uncertainty of the markets is higher than it's ever been; given the tremendous pressure the financial system is under as well as the Federal Reserve induced low interest environment that has been inflicted upon us for better or worse. That is not to debate at this time, but it is reality.

We are living in a period where uncertainties are high, there is a useful concept and exercise to go through to help structure a nest egg to weather a storm within the financial markets, accommodate unexpected expenses, and provide the funds for various lifestyle activities such as travel.

Going through this exercise may require working longer in preparation of a more stable retirement, but at least it will provide the future retiree with clarity and peace of mind. The first step is planning and creating your financial buckets. The word buckets simplifies the concept of how accumulated wealth needs to be viewed and how much will be needed.

Generally speaking, there should be three basic categories of buckets drawn out on a diagram during the bucket planning process: These buckets can be categorized as the investment bucket, the income supplement bucket, and the major expenditure and lifestyle bucket.

To help explain these categories and purpose of each of these buckets, consider this scenario. Suppose an advisor is working with a client that is 65 and determines that he or she is one more year away from finally making the transition into retirement lifestyle. The client, along with their advisor, has determined that approximately $1,500,000 will be needed to supplement their income through their life expectancy.

In the investment bucket, the advisor and client determined that an additional income between $50,000 and $60,000 from investment portfolios per year in today's dollars will be needed above supplemental income from Social Security and pension payments (meaning current requirement not increased by an assumed rate of inflation).The advisor determined that they have a sufficient probability of not outliving their assets, with a smaller portion left over for their children to utilize, in accordance with their life expectancy.

Regardless of the overall total return of investment assets, they will typically be withdrawing 3.5% to 4% of the beginning total asset value in any given year. Assume that both the advisor and the client are comfortable with this scenario and that enough assets are held to begin considering retirement, as well as long term health care insurance in place to cover that risk.

The second bucket is the income reserve bucket. This bucket should have one to two years of income supplement on hand. For example, if the annual desired income supplement is $60,000 in this case, than a bucket of $120,000 would be created and isolated, with a more liquid investment objective assigned to it which could be comprised of money markets, short term bonds and regular or tax free bonds.

Why should you have an income reserve bucket? If the market unexpectedly declines and significant damage is done to the investment bucket, you want to have the flexibility to shut the income flow off and be able to live off of the income reserve while the investments recover. This may take time. Severe damage can be done to a portfolio by withdrawing funds while it is significantly down in value. Once the investments have recovered and even appreciated, the retiree can then take profits out to replenish the income reserve bucket once again.

The third bucket is the major expenditure and lifestyle bucket, which could include subtitles such as home improvements, autos, annual travel, family gifting, etc. Separate each of these subtitles into separate accounts. Assigning a subtitle to each account will force the exercise of assuring that expenditures will be planned for, not a surprise that could potentially interrupt investment capital.

Debt should be very limited or eliminated entering the retirement years. The ability to pay these debts is limited for a retiree living on a fixed income without wages.

Bucket planning may require additional years in the workforce to accumulate necessary funds but this exercise is well worth the effort. Having a system in place to alleviate some of the uncertainty is the key to a comfortable retirement.


Steven Zeller, Advisory Services offered by Zeller Kern Wealth Advisors, one of the leading Sacramento Wealth Management firms and a Registered Investment Adviser.