The Traverse City Business News featured DGN Weatlhcare in the October 2023 edition:
The Bucket Approach to Retirement Spending
By Rick Garner, CFP®
Actuaries at the Social Security Administration project that a 65-year-old man has a 34% chance, and a 65-year-old woman has a 45% chance to live to the age of 90. The prospect of a 20 or 30-year retirement is not only reasonable but should be expected.1 One approach to prepare for 2-3 decades of retirement is to segment your expenses into three buckets:
- Basic Living Expenses
- Discretionary Spending
- Legacy Assets
Basic living or non-discretionary expenses are essential in our daily lives and include such things as food, rent, utilities, etc. – these expenses are commonly funded with income that is guaranteed. Social security benefits, annuities, whole life insurance and pensions are examples of guaranteed inflows (high levels of certainty, minimal risk). The Social Security Administration is anticipating social security benefits to be reduced by 13% in the next 15-years2 making guaranteed income an even more important part of the planning process. Setting aside sufficient funds in this bucket to cover these necessary expenses will help individuals and couples navigate the uncertainties of retirement and put one’s fears to rest. Further, isolating essential expenses has a powerful impact on the retirement outlook, reframing the mindset for the next two buckets of elective spending.
Vacations, dining out, home upgrades, entertainment, etc. are represented by the discretionary spending bucket. Discretionary spending often spikes just prior to or early in retirement. After all, you’ve worked hard to save. Spending on these items is new and exciting. As time passes, the amount of spending diminishes or transitions from voluntary spending to covering medical expenses. To fund these costs, one can consider investments that pay a steady dividend with the potential for growth. Because this bucket is more variable in nature, investors may decide to take on more risk, trading off a bit of certainty. Investment withdrawals should be carefully orchestrated to avoid unintended consequences. The tax implications of which – if not closely monitored – can result in not only greater tax liability but also higher Medicare premiums. Withdrawals from taxable or retirement accounts are taxed as ordinary income whereas income from non-qualified or tax-free accounts may be more tax efficient.
Are you charitably inclined? Or do you wish to leave a nest egg to your heirs? Legacy planning – bucket #3 - can be achieved through qualified charitable distributions, establishing donor advised funds, early gifting, utilizing a revocable Trust during your lifetime or a complex combination of strategies. Leaving a retirement asset can result in a large tax bill for a non-spousal beneficiary who – due to the SECURE Act – is required to distribute inherited IRA funds within 10 years of the death of the grantor. The average age of a recipient of inherited retirement funds is 50. These are prime earnings years, possibly the highest tax bracket of the beneficiary’s lifetime. Early gifting may be beneficial for all parties. The 2023 annual gift exclusion is $17,000 for an individual or $34,000 for couples.
A bucket plan can help you prepare for a comfortable retirement. But don’t wait until your retirement date is set to put a plan into action. Find a tax-savvy financial professional to lay the groundwork, filling the buckets with the right investment solution to fund your bucket list.
1 LongevityIllustrator.org, 2023
2 SSA.gov, 2023