Do you understand how to use the bucket strategy for retirement? One listener has a question about how to use the bucket strategy and whether or not it is too conservative. I also answer another listener question about the 5-year rule for Roth conversions. And finally, we discuss a retirement headline about the shift from passive equity funds to active equity funds and what that could mean for you. Get ready to prepare for your retirement by listening to this episode of Retirement Starts Today.

Do you understand how to use the bucket strategy for #retirement? Click To Tweet

Outline of This Episode

[1:32] If I have 3 years of cash in buckets, isn’t that too conservative?
[7:40] Don’t focus too much on the idea of buckets
[11:00] A Roth IRA conversion question
[13:15] Passive equity funds surpass active funds

If I have 3 years of cash on hand for retirement in buckets, isn’t that too conservative?

One listener asks if the bucket strategy for retirement withdrawals is too conservative. He wants to know my opinion and where that cash comes from. First of all, there are several types of cash. You should have cash in your IRA or 401K. But you should also have 3-6 months of cash saved in a money market as your emergency fund. You should also have cash on hand for any large expenses you have coming up in the short-term. Any money beyond that can be referred to as ‘moldy money’ and should be cycled back into your overall retirement plan. So, your monthly needs come from inside your IRA and your emergency fund comes from outside your IRA. A typical retirement strategy using the bucket system consists of 60% stocks and 40% bonds. The cash that you’ll have on hand will come from the bonds portion.

The bucket strategy for #retirement is a strategy that tells us that we need to separate our investment strategy into 3 buckets: the short term, the intermediate, and the long-term buckets. Click To Tweet

How to use the bucket strategy for retirement

The bucket strategy for retirement is a strategy that tells us that we need to separate our investment strategy into 3 buckets: the short term, the intermediate, and the long-term buckets. So, your monthly cash comes from bucket 1, bucket 2 includes your intermediate assets like corporate bonds and high yield bonds, and bucket 3 is where your money grows. You use bucket 2 to fill bucket 1 periodically. And bucket 3 fills bucket 2 as needed. The bucket system is merely a visual aid to show the different jobs of your portfolio. It can help you conceptualize your long-term needs. Listen in to hear how to keep your buckets filled and learn how to set up your own bucket strategy for retirement.

Do you have to wait 5 years to withdraw from a Roth IRA after you have converted from a 401K?

A listener recently converted some money from a traditional IRA into a Roth IRA and he asks if it is true that you have to wait 5 years to withdraw those funds. The answer is yes, there is a 5-year waiting period rule. But this shouldn’t matter. The Roth IRA should be the last piece of retirement savings that you spend. This money should be invested for the long-term and it should be the most aggressive piece of your portfolio. If you have any money left over for your children the Roth IRA is the best tool to do so.

Every dollar you can save toward #retirement counts. Click To Tweet

Passive equity funds surpass active funds

According to a Bloomberg news article, inexpensive, passive equity funds have beat out stock pickers. Now there are more dollars invested in passive funds than in managed funds. People have finally realized that it doesn’t make sense to use a stockpicker to try and beat the market at 10x the cost when they are wrong 80% of the time. The moral of the story is that every dollar counts. It is important to know what your investments are costing you. If you can shave a quarter or a half of a percent on your portfolio then that will compound over time.