How The Money Cycle and The Bucket Plan Can Protect Your Assets
Protecting your assets is a fundamental goal in personal finance, and two powerful concepts—the Money Cycle and The Bucket Plan—provide frameworks to achieve this. These strategies help manage your savings and prepare you for various financial stages and challenges. Let’s explore how these concepts work and how they can safeguard your financial future.
The Money Cycle
The Money Cycle outlines the three main phases most people experience during their financial lives: accumulation, preservation, and distribution.
- The Accumulation Phase starts early in life when you work and build wealth. You can afford to invest more aggressively in this stage as you have plenty of time to recover from market downturns. This phase is focused on long-term growth.
- The Preservation Phase begins as you approach retirement. The focus shifts to preserving A PORTION of your assets to provide reliable distributions in retirement. You do not have as much time to recover from market downturns in this phase.
- The Distribution Phase involves withdrawing from your portfolio to fund your lifestyle and eventually transferring wealth to heirs. By strategically drawing down your assets, you can maintain a steady income throughout retirement and leave a legacy for your loved ones.
The big mistake we see people make is going straight from the accumulation phase to distribution. They continue to invest as if preparing for retirement a long way out but are already retired or about to retire. The problem with this is when the market has big corrections during distribution, as it always does, they may be forced to sell investments for income and never be able to return that money. This runs the risk of running out of money later in life.
What’s the solution? Preserve A PORTION of your assets as retirement nears. Take a bucket-planning approach to the distribution of income.Look at distributions in terms of money you will need now, soon, and later.
The Bucket Plan
The Bucket Plan is a strategic approach that segments your money into three buckets based on when you need the funds. This ensures you will have money available today and well into the future.
- The Now Bucket covers expenses for the first year or two of retirement. It includes your emergency fund, monthly income, and major planned expenses. This bucket is kept liquid with minimal exposure to market risks, typically in cash. Having readily available funds prevents you from liquidating long-term investments during market downturns, protecting your long-term growth assets.
- The Soon Bucket is for the next 10 years or so. This money is accessible when needed, bridging your Now and Later buckets. It is invested conservatively to keep pace with inflation while minimizing risk. This bucket safeguards against inflation and sequence of returns risk.
- The Later Bucket is focused on long-term growth and legacy planning. Due to the longer time horizon before the funds are needed, this bucket can be invested in higher-risk, higher-reward opportunities. With the Now and Soon buckets, you essentially buy a longer timeframe. By positioning long-term assets for growth while having other buckets to draw from, your portfolio has the opportunity for long-term growth without worrying about short-term volatility.
Conclusion
The Money Cycle and Bucket Plan offer valuable insights into protecting your assets throughout different stages of life. By segmenting your funds and adjusting your investment strategies as you progress through each financial phase, you can help ensure a secure and stable financial future.
Consult a financial professional at Harford Financial Group today for personalized advice and to create your own bucket plan.