Getting Started/The Bucket Strategy
INVESTINGWe come to the investment table for different reasons. Do any of these sound familiar?
- You landed the perfect job, and your employer matches––winning.
- Extra funds are available after writing that last college tuition check.
- Retirement is around the corner, yet your portfolio isn’t where you’d like it to be.
- Your idea of living involves a camper and miles of open road.
- A life shift means you’re jumping back into the workforce––perhaps, switching industries––and curious about how much to bank monthly.
All of these have one thing in common: getting started. We crawl before we walk. We walk before we run. Investing is no different, no matter your age or stage of life. Taking your first steps toward building wealth doesn’t have to be filled with trepidation.
Buttonwood Wealth isn’t a cookie-cutter wealth management group. We get our clients thinking about things in buckets. We create a mindset to do the basics before considering bigger dreams. This applies to any stage in the “savings” journey. If you have crazy credit card debt and a mortgage that leaves you wringing your hands monthly, oodles of investing is the last thing you want out of the gate. To us, the journey looks a little something like this:
Bucket 1: Emergency Fund
- Goal: Fill this bucket up with 3-to-4 months of after-tax income
- Benefit: Covers unanticipated emergency expenses: job transfer, home & auto maintenance, health care, etc.
- Suitable Investments: Cash & Cash Alternatives. Principal protection & liquidity are paramount
Bucket 2: Employer Sponsored Retirement Plan
- Goal: Maximize contributions to employer sponsored retirement plans (e.g., 401k, 403b, 457, Simple IRA, Sep IRA, etc.)
- Benefit: Company retirement plans typically offer the largest ability for tax-preferred savings, and tax-deferred growth. Provide a reliable source of income to fund living expenses during retirement.
- Suitable Investments: Stocks, Bonds, Mutual Funds, Alternative Investments
Bucket 3: Individual Retirement Account (IRA) or Roth IRA
- Goal: Maximize annual contributions after filling your employer sponsored plan bucket
- Benefit: Another source of retirement income. Provides tax-preferred savings and tax-deferred growth.
- Suitable Investments: Stocks, Bonds, Mutual Funds, Alternative Investments
Bucket 4: Non-Retirement Investment Account; aka “Slush Fund”
- Goal: Unlimited savings capacity once Buckets 1-3 are satisfied. Can also be used as an emergency fund
- Benefit: Ability to put money in, and take money out, at any time. No cap on contribution amounts. Separate tax treatment from traditional retirement accounts. Can meet mid-term financial goals and supplement retirement
- Suitable Investments: Stocks, Bonds, Mutual Funds, Alternative Investments
Bucket 5: Additional Savings Strategies
Savings and investment is not exclusive to traditional investment accounts. However, we believe most investors will be well served by sticking to the above outline. Additional strategies come with larger tradeoffs than a traditional investment account model. These tradeoffs need to be understood and weighed appropriately.
Permanent Life Insurance; aka Cash Value Life Insurance
- Pros: Builds cash value as a form of savings inside a life insurance policy.
- Cons: Inefficient investment growth, limited investment choice, expensive, opaque
- Suitable: Estate planning, indefinite family protection needs, business transition planning, etc.
Annuities
- Pros: Products utilizing insurance for investment protection
- Cons: Illiquid, distributions can be tax inefficient, expensive, limited investment selection.
- Suitable: Very select instances. Typically, not needed if proper financial planning has been done
Rental Property
- Pros: Value appreciation. Stable income payments in the form of rents
- Cons: Illiquid, tenant uncertainty, unknown maintenance costs are ongoing
- Suitable: Investors active in the real estate market: property developers, realtors, contractors, etc.