When I am explaining retirement planning to my clients, I like to use the analogy of buckets to help people visualize what they need to do to prepare the most appropriately for retirement.
Think of retirement planning in this way:
There are five financial buckets a person needs to use, in a specific order, to achieve optimum financial success:
- Long-term Care
Bucket 1 – INCOME: With whatever amount of money you have gathered over your working career, the first task is to lock down a guaranteed income you cannot outlive. I know there are many issues, but if you have a guaranteed income it solves most other problems.
Bucket 2 – INFLATION: There is an inflation index called CPI, which graphs how living expenses have increased over the years. But what is “real” inflation? I have kept track of my expenses for several decades. I can refer back to cancelled checks and receipts showing what I paid for living expenses in 1979. For example, I can tell you what I paid for a postage stamp. My calculations show that inflation has been twice what the CPI tells me. Do this for yourself. Keep track of what you pay for gasoline, food, utilities, taxes and so forth each year. Refer to your past tax records. Learn what life is really costing you and learn how to keep ahead. Without securing Bucket 1, you will not have anything to keep up with inflation.
Bucket 3 – LIQUIDITY: Emergencies happen all the time. Plan for them. It is important to have extra money when surprises happen and this money needs to NOT be tied up in accounts that you can’t get at. It must be liquid funds. As important as liquid cash is in an emergency, remember you must first create Bucket 1.
Bucket 4 – LONG-TERM CARE: If you have enough guaranteed income (Bucket 1), which is inflation-proof (Bucket 2), and adequate liquidity (Bucket 3), then you may not need to purchase a long-term care insurance policy. As you can see, the order by which you deal with each bucket is most important. Many people have enough income, so they don’t need to worry about long-term care. However, let us assume you don’t have enough guaranteed income to pay for care in your old age. Now what? I am sure you understand that a prolonged visit at a nursing home or assisted living center or hiring home health care can quickly wipe out all your retirement savings. After a prolonged illness, surviving spouses can be left penniless. We love our spouses and will do most anything to assist them. But what if you are the one to go to a care center? What if you were the one who drained the retirement money, how would you feel? To solve this, you will need to purchase a long-term care insurance policy.
Bucket 5 – LEGACY: If you have prepared the other four buckets appropriately, you will create a beautiful legacy for your loved ones. The fifth bucket can only be filled once you have the other four in place. Once you do, then you are ready to do final preparations where you get organized, create a living trust with a will, and a medical directive with a power of attorney. Keep this updated with family changes. When you die, you will make your family very happy if you have done all this organization in advance. You will be remembered as someone who truly loved his/her family, even from the grave, because you thought enough about those you love to plan ahead. Contrast this with six out of seven people who die with no will/trust, no records, no list of assets and no written plan… essentially, no legacy. How do you think this disorganized person will be remembered?
Your life can be financially rewarding if you have planned well, lived well and died well. Money is not the most important thing in life, but it has the largest impact on relationships and memories. For you to achieve financial peace of mind in this life, I suggest you prepare these 5 buckets in exactly the order I have prescribed. If you do, you will be ready to retire, and ready to go when the time comes having prepared properly.