How To Retire With ‘Buckets’ Of Money


One of the age old retirement questions is, how much money do I need to have saved for a successful retirement? Is it $1 million? $2 million? Or even more? However, there is no magic retirement savings number. While it is important to accumulate assets and wealth over your working years, it is not always about how much you have saved for retirement but how much income you will have in retirement that matters.

That means you need to be able to turn your savings into income to meet your needs in retirement, which can involve extremely complex retirement income planning in order to address a number of unknown retirement variables like how long you will live, the impact of inflation, and market returns. So how can you simplify complex retirement income planning into an easier to digest strategy that fits your individualized needs? The answer might rest with using mental accounting to better envision what a secure retirement looks like for you.

A new white paper by Diane Garnick, chief income strategist for TIAA, tackles the importance of aligning a client’s mental accounting to a retirement income strategy by separating income needs  into “buckets” and then identifying sources of income that will be used to meet these needs. From our first paycheck we use mental accounting to make difficult budgeting decisions quickly by splitting up how we plan on using our money. During working years, if we are off a bit on our mental accounting and we overspend or under budget, time is on our side and we can recover. But, as Diane Garnick notes, “once you are in retirement, time is no longer on your side, budgeting and spending mistakes can be hard, if not impossible, to recover from.”

As such, Diane notes that a good retirement income strategy breaks down expenses into specific “buckets.” While there is no set number of buckets a person can divide up their retirement needs into, Diane uses six different types of expense buckets, necessities, health care, emergency fund, bequest, fun and luxury items.  Then retirement income sources are specifically identified for meeting each of the income goals.  By dividing expenses up an individual can better visualize their retirement needs and can understand why they have certain income streams in place. According to David Littell, the Director of the Retirement Income Program at The American College of Financial Services, “a bucketing strategy works very well from a behavioral finance perspective because clients can better envision how their assets are used to meet their income needs, and the better the client understands the plan, the more likely they will buy into it.”


Splitting up expenses into different buckets, also allows the individual to prioritize their retirement goals and objectives. For most people, necessities, health care costs, and emergency funds are the highest priority, followed by fun, legacy, and luxury items. The next task is to identity which expenses fall into each of these categories. For instance, for some people golf might fall into the luxury item bucket, for others into the fun bucket, and for true golf enthusiasts it might even feel like a necessity. As such, there is no set amount of money that needs to be directed towards any specific bucket, as the buckets will be determined based on the individual situation of the retiree.

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The next step is determining how to fund each of these ‘buckets’. Diane notes that you should take care of them in order of priority and match up more secure income streams for the expenses with the highest priority.  As such, you should not leave your essential expense bucket to chance. This means aligning secure lifetime income streams, like Social Security and pensions, to match up with the required expenses you expect to have throughout your life. However, if your pension or Social Security payment is not enough income to meet your essential expenses, you can consider purchasing an annuity to provide you with a fixed lifetime income product to match up with your necessities. By funding your necessities with a secure income stream can help retirees sleep better at night and feel more financial security in retirement. Similarly, health care expenses and emergency funds are high level priorities that also need secure sources of income.

But, how do you determine when you fund each bucket? According to Diane, “successful retirement outcomes can be achieved with one simple Mental Accounting change. Rather than allocate a small portion of each paycheck to many buckets, fully fund one bucket before moving on to the next.” By setting aside specific assets for each goal or bucket, you are able to move onto the next goal and actually spend the money guilt free. For example, if you highly value a bequest motive, making sure that this is taken care of first is necessary to feel comfortable with spending any of your savings for fun or luxury items in retirement. If you are not secure in knowing that expenses are covered, you may find yourself holding back on their spending.  This can leave a person feeling unsatisfied in retirement because they are not spending what they could afford to spend if they had a better plan in place.

So when you get to retirement, make sure you understand how your retirement plan works. Know where your retirement income is going to come from and prioritize your spending goals. This can help you better understand the role of guaranteed income streams and can help you live a more enjoyable and financially secure retirement. By prioritizing expenses, it also allows you to use riskier assets that have the potential for higher returns, for lower level priorities. In which case, good market performance can mean more resources for those lower level priorities. Using the right strategy for your situation can help you rewire your mental accounting and retire with ‘buckets’ of money to meet your goals.

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