One of the most rampant misconceptions about retirement planning is that it’s something you do right up until the moment you leave the workforce—and then, you’re home free. That’s simply not the case. Actually, retirement planning continues even into retirement itself—albeit in a different capacity.
Consider it this way: Before you retire, it’s important to make sure you have enough in your savings accounts to provide for you from retirement until the end of your life. Once you retire, however, it’s important to budget and manage your accounts properly—ensuring those savings last as long as they were supposed to, and making any necessary adjustments on the fly.
How to Use the Bucket Approach
One strategy to effectively plan spending is to use the bucket system—a way to segment assets into three basic categories.
- The first “bucket” is for short-term expenses—basically anything you’ll need within two years. This money needs to be highly liquid, which means either cash or short-term bonds.
- The second bucket is for expenses upcoming in three to six years. Work with your financial planner to decide how to carry these assets, but usually a mixture of stocks and bonds is appropriate.
- The third bucket is for more long-term expenses. For these assets, higher equity exposure is generally recommended. Again, it’s important to go into specifics with your financial planner.
Once you set up these buckets, you can decide how best to put them to work for your financial goals. Your short-term bucket may be used to fund day-to-day needs and to ensure an emergency fund; your middle bucket, meanwhile, can be put toward lifestyle goals, like planned travel or bigger expenses like cars or boats.
Separating Needs and Wants
As you work with your buckets, it’s important to have a clear delineation between needs and wants—the things that are needed for daily survival and the things that aren’t. You may further distinguish your wants, drawing a distinction between realistic short-term desires and long-term dreams.
Once you make these clarifications, you can better assess how much money you actually need in your retirement—and that, in turn, can help you finalize a basic living budget. If there’s a gap between your savings and your goals, you can work with your financial planner to close that gap—whether by altering your investment strategy, reducing your expenses, or something else.
Retirement Planning Never Stops
The last thing anyone wants is to run out of money during their retirement. That’s why it’s important to start saving and investing in advance, but it’s also why it matters that you stay on top of your budgeting and financial planning even into retirement. Changes in your goals, lifestyle, healthcare needs, or the markets themselves may leave you needing to revise your retirement plans. Vigilance is key.
A financial planner from Stonepath Wealth Management can help you set the right parameters for your retirement. Contact us today to speak with an advisor.