You need these 3 investments

Buckets aren’t just for the beach or rainy days. Today, we’re talking about the Three-Bucket Strategy aka the investments you need for a retirement so fabulous, even your future self will be impressed.

Drawing from experience working with thousands of families, we came up with a system that involves dividing funds into distinct buckets, each serving a specific purpose. In this installment of Guerra Financial Tips, we delve into the details of the Three-Bucket Strategy. Examine the Emergency Fund Bucket, the Safe Income Bucket, and the Growth Bucket, while touching on the optimal timing for transitioning between them.

The three-bucket strategy unveiled:

1. Emergency fund bucket: Rapid access to financial safety nets

The first bucket in this comprehensive strategy is dedicated to addressing emergencies that require immediate financial attention. This Emergency Fund Bucket should be quick to access and contain liquid assets such as Checking Accounts, Savings Accounts, Money Markets, or Certificates of Deposit (CDs). The idea behind this bucket is to ensure that you have instant access to funds when faced with unexpected financial challenges.

We recommend considering Money Markets, which can yield a notable 5-6% return—far surpassing the interest accrued in standard bank savings accounts. By strategically placing emergency funds in accounts that offer higher returns, individuals not only safeguard their finances but also capitalize on potential growth opportunities.

2. Safe income bucket: Investments for your initial years of retirement

The second bucket, known as the Safe Income Bucket, plays an important role in supporting individuals during the initial 5-10 years of retirement. This period is often characterized by the need to withdraw a specific amount annually to supplement retirement income and cover essential expenses. We recommend keeping 250k to 500k in this bucket to ensure a steady income stream.

Fixed or Indexed Annuities emerge as the preferred accounts for the Safe Income Bucket, offering a unique combination of security and returns. By opting for these accounts, individuals stand to gain 2-3 times higher returns compared to a traditional savings account, all while avoiding risks associated with the market. This strategic approach empowers retirees to meet monthly financial obligations with minimal exposure to economic uncertainties.

3. Growth bucket: Investments to accelerate wealth

The third and final bucket, aptly named the Growth Bucket, is designated for capitalizing on higher returns and allowing wealth to grow at a quicker pace—typically ranging from 8-12% annually. Because more risk comes with this bucket, it is best to leverage its potential for growth.

The beauty of the Growth Bucket lies in its ability to generate returns over time, making it an ideal choice for individuals with a horizon of 5-10 years before tapping into these funds for income. While volatility may be higher, the strategic division of funds ensures that the impact of market fluctuations is minimized. No matter your risk tolerance, one of these investments will suit your retirement.

Timing is key: Massage your investments for a safe retirement

One of the critical aspects of the Three-Bucket Strategy is the meticulous timing of moving funds between the Growth and Safe Income Buckets. This shift becomes particularly significant as individuals progress through different stages of retirement. While the Growth Bucket offers potential for higher returns, the Safe Income Bucket provides stability and security. Therefore, a well-timed transition ensures you are maximizing growth opportunities without compromising financial security.

The Three-Bucket Strategy represents a simple approach to distributing your wealth into the best investments for your retirement journey. By strategically dividing funds into the Emergency Fund Bucket, Safe Income Bucket, and Growth Bucket, you can navigate multiple financial scenarios with confidence.

Ready to get start using the Three-Bucket Strategy? Reach out to an advisor and we’ll get you on a plan to financial freedom.