Harold Evensky, chairman, Evensky & Katz/Foldes
Financial in Coral Gables, Florida, says one “bucket” strategy is based on time
or age: individuals would have a “bucket” of assets to use from age 65 to 75,
another to use from age 75 to 85, and another for after age 85, for example.
A second “bucket” strategy, according to Evensky, is based
on goals or fixed versus variable expenses. One bucket could be set aside for
basic living expenses, another for funding college savings of a child or
grandchild, and another for traveling or whatever other goal or variable
expense a retiree has.
Evensky tells PLANADVISER he is not a fan of either of these
bucket strategies. The problem with the goals-based bucket strategy is if the
goals are not prioritized chronologically, the individual may over-save and not
have money for the short term, or vice versa, Evensky says. Daniel D’Ordine,
CFP, DDO Advisory Services, LLC, in New York City, adds that food, shelter and clothing
are obviously fixed expenses, and most would say vacations are variable
expenses, but the line between fixed and variable often gets blurred by
“The time-based bucket strategy is manageable; an individual
would invest the short-term bucket in bonds and the longer-term buckets in
stock,” Evensky explains. “But as the individual gets older the tax and
transaction costs of rebalancing buckets will eat the person alive. That
strategy is cost and tax inefficient.”
Cost and tax efficiency are the reasons D’Ordine advises clients
who are working and in retirement-savings accumulation mode to fund three
buckets of assets—tax-deferred, taxable and tax-free. He tells PLANADVISER the
goal is to prevent a situation during retirement in which everything is in the
tax-deferred bucket. “If all of the assets/accounts from which retirees are
drawing are tax-deferred, then [the retirees] are at the mercy of ordinary
income tax brackets,” he notes. According to D’Ordine, in many states—such as
New York, California and Massachusetts—that can mean that to spend $100,000, a
retiree would need to withdraw $140,000 or $150,000.
He suggests three buckets for retirement income:
- Tax-deferred – This would include
employer-sponsored defined contribution (DC) and defined benefit (DB) plans, individual
retirement accounts (IRAs) and non-qualified deferred annuities—all for which
retirees would pay ordinary income tax on distributions.
- Taxable – This could include a taxable brokerage,
mutual fund or investment account—from which retirees would pay capital gains taxes,
which D’Ordine notes are currently more favorable than ordinary income taxes.
- Tax-free – This would include Roth IRAs, Roth 401(k)
or 403(b) accounts, and cash value life insurance, if appropriate. D’Ordine
says municipal bonds fall into this category because the income is typically