When saving for retirement, many tech employees leverage the most readily available tools – a 401k being the most popular. However, depending on your unique lifestyle, it’s possible that maxing out your 401k each year won’t be enough to build a retirement nest egg that facilitates the type of retirement you’ve imagined for yourself. 

Instead, viewing your savings and portfolio as different “buckets” available to use at different times throughout your retirement journey can be helpful. 

What Is A “Bucket” Strategy?

The bucket strategy isn’t a new idea by any stretch of the imagination. Investors have used it to create a streamlined retirement plan for many years. The idea is pretty straightforward: 

You create various buckets of investments that you can use during retirement. Each bucket is designed to get you to and through a different season of retirement and may be invested differently based on the goals you have for that season of life. For example, you might have a “bucket” of your portfolio specifically designed to be a low-risk reserve for use immediately after retirement. You don’t want the overall value of that “bucket” to diminish because you’ll need it sooner rather than later. 

Another “bucket” you might have could be intended for later during retirement when you may have rising medical costs and need more cash flow to cover things like memory care, modifications to your home to accommodate age or disability, etc. This bucket could be invested more aggressively (because you won’t need the funds right away), with a plan to slowly rebalance over time as you get closer to needing to draw down those funds. 

Tax-Deferred v. Taxable Accounts

You can also view your “buckets” in retirement as your retirement savings vehicles are broken up by how they’re taxed. A 401k is a tax-deferred account. In other words, it’s funded with pre-tax dollars when you contribute to it while working as an employee. You’re “deferring” taxes to when you retire. Unfortunately, you’ll sometimes be taxed more when you retire than when you’re early or mid-career because your income steadily increases. 

One way to offset taxes in retirement and maximize your savings is to have different “buckets” of accounts taxed in different ways. For example, you might have your traditional tax-deferred 401k. But you could also have a Roth IRA, a taxable account (funded with after-tax dollars now and offers tax-free withdrawals when you retire). You could also have a taxable brokerage or other investment account. 

Because each of these account types is taxed differently now and, in the future, you can take advantage of different benefits across your financial life cycle. Your 401k contributions help to lower your taxable income today, while a Roth IRA contribution helps to set you up for tax minimization in retirement. 

It’s important to note that most tech workers make too much income to qualify for Roth contributions when working. But this doesn’t mean you can’t retire early! During low-income years (like when you reach retirement and cut back on hours or stop working), you can likely convert 401k/IRA funds into Roth funds. You can do this by taking your IRA distribution, paying the taxes on the withdrawal in the lower tax bracket, and then converting the funds to Roth. 

From there, you can start taking social security and required minimum distributions (RMDs) when needed or required. This is an excellent strategy for people with large 401k/IRA balances who can pay their expenses while facilitating conversions. Due to tax rules on inherited IRAs, it’s also an advantage for their heirs to inherit Roth accounts instead of IRA accounts.

The Need For Diversification

If you choose to only contribute to your 401k, you could set yourself up for a higher tax bill in retirement and preceding potential growth that can nurture a lifestyle you love for the long haul. Ultimately, the bucket strategy prioritizes diversification in two ways – 

  1. Diversifying the different types of accounts you invest in to minimize your tax burden across your lifetime. 
  2. Diversifying the asset classes you invest in to balance risk and return throughout retirement while creating consistent cash flow that meets your unique needs and goals. 

Investing For The Long Game 

Ultimately, the bucket strategy will give you more control over your portfolio now and when you retire. 

Creating a “bucket” strategy where you’re able to take advantage of varying asset classes while still mitigating risk in your portfolio allows you to:

  1. Harness the power of compound interest by introducing different “horizons” for each bucket into your portfolio. In other words – you may have some low-risk, low-growth funds available for immediate use, but you can leverage compound interest by giving long and mid-term buckets room to grow. 
  2. Create a tax-efficient strategy and reduce your lifetime tax bill. 
  3. Allow yourself more flexibility and freedom of choice in retirement by being well-diversified. 

Investing is a long-term play. Different “buckets” available to tailor to your unique situation and goals allow you to plan for a brighter future.

Have Questions?

You’re not alone if creating a unique bucket strategy for your portfolio feels overwhelming. Venturing outside of investing solely in your company 401k for the first time can feel stressful. Having a fee-only financial advisor in your corner who wants to help you create a plan that aligns with your goals and values can help. 

If you want to learn more about diversifying your portfolio or how the bucket strategy can help you build wealth and cash flow throughout retirement, I’d love to chat with you. Reach out to me today by clicking here. 

After a successful career in high-tech, Sheila McGinn, CFP® followed her passion and became a fee-only Financial Planner, where she helps clients navigate complex financial decisions and reach their financial goals.

Disclaimer: This content is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. For advice specific to your situation, consult a financial planner, accountant, and/or legal counsel. Reproduction of this material is prohibited without written permission from Brightview Financial Solutions, LLC, and all rights are reserved.