The Soon Bucket Solutions Within The Bucket Plan®

When it comes to determining which investment product or strategies you are going to recommend in your client’s plan, advisors typically consider risk tolerance, time-horizon, and in some cases the tax qualification to arrive at a prudent recommendation. As a general rule of thumb, the longer the time horizon before the client may need or will need to access their money, the easier the decision process for the advisor regarding implementation of an investment solution to help the client meet their goals. The challenge occurs when clients may need or will need to access some of their money sooner rather than later. What are the best options to help the client protect and preserve the portion of their nest egg they will need to rely upon for income while not sacrificing growth potential to offset inflation, all while minimizing taxation? In this article, we will discuss how utilizing The Soon Bucket can help advisors confidently invest their clients assets.

The most successful advisors are those who are able to meticulously communicate their planning philosophy, how the investment products and portfolios they recommend contribute to the overall success of the plan, and how the plan will bring peace of mind to the client.

One of the most basic principles of investing is to gradually reduce your risk as you approach a point in which you will need to draw off your investable assets, since retirees don’t have the luxury of waiting for the market to bounce back after a dip. The dilemma is figuring out exactly how safe you should be relative to your stage in life.

For years, a commonly cited rule of thumb has attempted to help simplify asset allocation. It states that individuals should hold a percentage of stocks equal to 100 minus their age. So, for a typical 65-year-old, 35% of the portfolio should be equities. The rest would be comprised of safer assets. There are four main problems to this type of approach we have observed:

1. Clients don’t understand how asset allocation translates to income generation
2. With a generic asset allocation formula, you could neglect that clients might have below average or above average life expectancy, which could cause them to become too cautious, missing growth opportunities or too aggressive, causing them to run out of money
3. Client’s may become too conservative later in life, investing in assets that might not be tax efficient to a surviving spouse or other beneficiaries
4. Struggles with properly identifying and implementing opportunities with “safer assets” while still being able to earn a competitive interest rate

As a solution to overcome these four problems, Clarity 2 Prosperity redefine traditional asset allocation through The Bucket Plan®.

In this three-bucket approach, we call the first bucket the Now Bucket. The Now Bucket is generally cash or cash equivalents and is typically made up of your emergency fund to cover planned expenses in the near future, as well as planned expenses or income you will need in the next year or two. In the Now Bucket, you are willing to sacrifice the rate of return that you may have otherwise earned if you would have invested that money.

The Soon Bucket Explained

The second bucket is the Soon Bucket. In order to determine the most appropriate investment strategies, portfolios, or investment vehicles, it is important to compartmentalize the money you may need sooner rather than later and invest that money more conservatively than you would invest the rest of your money. This Soon Bucket will buy you a time horizon to

confidently invest the remaining amount of your money in the third bucket, which is the Later Bucket, for long-term growth.

The biggest challenge advisors face while implementing The Bucket Plan® is how to “fill” the soon bucket in today’s market environment. While there is no “perfect” financial product and there are tradeoffs associated with each decision, a fairly straight forward decision tree can be followed to assist in building out a client’s Soon Bucket, including questions such as:

• Does the client intend to take any of the following from their accounts?
  • Steady retirement income
    • If the clients will need steady retirement income, how much of their income would they want guaranteed (via CD ladder, bond ladder, or annuity income)?
      • If so, do they seek lifetime guaranteed income or guaranteed income for a period of time such as 5 or 10 years within their Soon Bucket?
    • Could the client live off of dividends & interest from their portfolio, or would they need to spend principle to satisfy their retirement income needs?
  • Periodic or planned withdrawals
  • Required Minimum Distributions
  • Roth conversions
• Are there taxation benefits of utilizing pre-tax money vs post-tax money, or a blended combination of each?
  • Could tax planning today put their surviving spouse or beneficiaries in a better position in the future?
  • Could we use the high standard deduction to diffuse tax liability from the pre-tax money?
  • Could we use the preferential long-term capital gains and dividend rates to reduce marginal tax traps?

Could we reduce the tax on Social Security & Medicare premiums through layering different income types?

Conclusion

Once you have this baseline of information gathered, you are armed with the details of establishing a Soon Bucket. As we

look through investment solutions for The Soon Bucket, we have many investment categories to choose from, each with unique characteristics to help the client achieve their retirement goals. In some cases, a mix of these options might be the best fit for the client.

We have collaborative with hundreds of financial planners and investment advisors nationwide and created a visual of different investment types which could be leveraged in the Soon Bucket if a client is seeking income, ranked from lower risk / lower expected return all the way through higher risk / higher expected return.