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Dispatches

A Six-Bucket Strategy for Funding Retirement

TIAA suggests that a mental accounting bucket strategy can help people better prepare for retirement, and it can also make spending decisions easier for retirees.

TIAA suggests that a mental accounting bucket strategy can help people better prepare for retirement. It can also make spending decisions easier for retirees. This form of mental accounting allocates funds by types of expenses with the goal of alleviating concerns about how money is being spent. TIAA specifically recommends filling up the most essential bucket first and filling each subsequent bucket only after the preceding buckets have already been filled.

The initial bucket covers necessities. These are expenses necessary for day-to-day living: housing, food, transportation, etc. Include in this bucket related costs such as utilities, home owner’s insurance, gas and car maintenance. You should also think about what discretionary items you would have a hard time living without—cable TV, a cell phone or theater tickets—and treat them as necessities.

The second bucket for out-of-pocket health care expenses could total $250,000 for a 65-year-old couple, based on data cited from the Employee Benefit Research Institute (EBRI). One way to fund this bucket is to open a health savings account, if eligible. Such contributions can be made prior to retirement, but not spent until in retirement. (See “Health Savings Accounts” in the July 2016 AAII Journal for more information.)

The emergency (third) bucket covers unanticipated expenses, such as a car repair. TIAA suggests setting aside a sum of money for charitable donations at the start of each calendar year. This money can be tapped for emergency expenses. Any amounts remaining at the end of the year should be donated to the charity. This could ease the pain of forgoing the money since it is already considered spent.

A fun (fourth) bucket covers hobbies, vacations and other related expenses. Create cash flows for each activity based on their expected timing.

The bequest bucket reduces the regret of spending money allocated to other buckets. It is also helps your heirs understand your wishes and what they might receive in the future. Invest this fifth bucket more aggressively.

The final bucket, luxury, is for completely discretionary purchases. It allows for guilt-free spending, since other expenses will already be covered. It can be used to take higher levels of risk since the money is intended for splurging instead of necessary purchases.

Source: “Income Insights: Mental Accounting in Retirement,” Diane Garnick, TIAA.

Discussion

Maurice Murad from CA posted over 9 years ago:

I just RE-TIRED and you right. I saved but I find my self all in one bucket or I do not have any definition of buckets. I need to get my self busy and figure this out. it is definitely a new life.


Champak Shah from PA posted over 9 years ago:

This six buckets just give you priority of your spending. Real challenge is how total much maximum you can spend without out living your money. There is 4% rule but it start at beginning of retirement with your your investments except house value. After that you increase your spending by rate of inflation very year. What need to be done is also factor your investments every year since your investments changes every year.This is similar to IRS RMD guide line but start at 4% and factor in inflation and how much financial asset you have available to spend.


Radomir Beranek from NY posted over 9 years ago:

idea. Just realize the flaws.


Dave Gilmer from WA posted over 9 years ago:

The biggest unknown here is the health savings bucket. Not many can allocate $250k to this or need to for that matter. Much is dependent on the healthcare insurance they have and the cost of it, not to mention what health issues you end up having.


Gregory Lawton from PA posted over 9 years ago:

I suggest that readers download and read the longer paper authored by Diane Garnick of TIAA, the link to which is posted immediately below the brief article posted above. The article posted in AAII is a brief summary of the ideas explained in more detail in the longer paper.


William Dove from CA posted over 9 years ago:

Retirement planning is an immensely complex problem with many moving parts and many uncertainties. This approach does give some comfort - as long as you've got 3 or 4 or 5 of them filled. If the first bucket is not yet filled, that's a problem. Interesting idea.


Steven Sears from IA posted over 9 years ago:

This is all very well and looks so good on paper. The government says there is no inflation, so the pension stays the same, but you have to keep increasing the size of your buckets. I have long term care insurance that was supposed to have a fixed cost. Every few years the contract is renegotiated and the cost doubles. Over the years I have watched the cost of healthcare double and double but my pay hardly increased and now the pension does not change. Last year I spent 40 hours in a hospital getting tested for chest pains and the total bill was $12,000. A doctor stopped by my room to shake my hand and a year later he is still sending bills. In a decade $250k will not buy a single bandaid. But it is a good thing to be organized and put your money in buckets. Then just sit back and watch it go.


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