Most people tend to think of financial planning as only building your wealth. All the thought and energy goes into accumulating money until you reach your “magic number” or retirement age. Through careful planning, saving and investing you can reach financial independence. All the hard work is over and now you just enjoy it, right? Not exactly.
An equal amount of planning and thought should go into the distribution phase of your financial life. People tend to think of their savings and investments as their “nest egg”. It is considered one giant pot of money that they now have to live on for the rest of their lives. In my opinion it should be considered as several “buckets” of wealth. We have the “qualified bucket” which contains all the IRAs, qualified retirement plans and pensions that one owns. Another bucket is the “non-qualified long term investments bucket”. This bucket holds our stocks, bonds and other investments which give us the potential for growth. We have already paid taxes on this money and it is there to help the portfolio increase over time. We also have our “conservative” money bucket. This bucket has money which is designed to pay out a certain amount. This bucket is usually used to plan for covering household expenses. Another bucket is the “short term bucket”. This bucket contains easily accessible money. It should be very liquid and can be used for emergencies and other special purchases.
Not only should one think about your “nest egg” as different buckets of money, but it is very important to consider which bucket to access at the proper time. Everyone’s financial situation is different. There are times when the traditional wisdom of financial planning doesn’t fit the particular situation. Please consult your financial advisor and tax professional before making any decisions on which money to choose at the proper time.
However, generally it is thought proper to first use the conservative money bucket to produce income that will cover household expenses. This produces a known quantity of income during retirement years. The non-qualified long term bucket is generally looked to next in order to supplement the income produced by the conservative bucket. Traditionally the qualified bucket is accessed later and certainly after the age of 59 ½. This is done to order to avoid any early withdrawal penalties and to allow for future tax deferred growth.
By carefully selecting which bucket you access first, you can better plan your income in retirement. As we see the income distribution phase of your financial plan is just as important as the wealth building phase.
An investment in knowledge always pays the best interest……Benjamin Franklin
For any questions on income distribution, please contact James Pitts at 727-686-4068.
Dr. James Pitts is a Registered Investment Advisor Representative and Financial Planner. He ran a successful dental practice for 25 years and by using financial planning techniques and investing wisely, he was able to retire at 51 financially independent and debt free. His passion is to help other people reach their financial goals and live the best life.
Call to schedule a free, no obligation consult or 2nd opinion.
Dr. James R. Pitts