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Retirement Planning: One Well, Three Buckets

Retirement is a stage of life that we all are instructed to prepare for during our working years, but developing a retirement plan is another matter entirely.  Between the challenges of the economy, and the complexity of investing, not enough Americans will be prepared to retire – in fact, a recent Pew Research study shows that Gen-Xers and even many Baby Boomers will fall well short of the typical goal of being able to fund 70-80 percent of their pre-retirement income.  That may sound dire, but it doesn’t mean that you can’t be prepared and create a plan that adjusts to changes in your life through retirement.

Why You Need Three Buckets for Your Retirement Well

How comfortably you retire doesn’t just depend on how much you save or accumulate – it also depends on how you invest those assets and how tax-efficiently you draw out funds.   Most people think of their retirement savings as one well from which they draw income late in life.  That’s partly true – but to maximize your retirement investments and minimize taxes, it’s wise to have three buckets, both for pouring in savings and drawing them out.

Retirement Bucket #1:  After-Tax Dollars

This bucket consists of the discretionary savings you have from your paycheck from month-to-month or year-to-year.  You have already paid taxes on the contributions to this bucket hence the only portion of this bucket that is taxed is the capital appreciation and that is taxed at capital gains rates.  Capital gains rates are typically lower than your marginal income tax rate, so having funds available to withdraw in this bucket will provide the flexibility to minimize your effective tax rate during the distribution phase of your life.

Retirement Bucket #2:   Traditional IRA

The IRA is a cornerstone of retirement planning because it allows you to invest pre-tax dollars.  This allows the investment to grow tax-free until withdrawal.  Assuming withdrawals happen during retirement at a time when your income and tax rate are expected to be lower, total tax savings can be significant.  You still pay tax when drawing out these funds, so it’s wise to maintain alternative retirement resources in the other buckets so that you may make withdrawals only when it is most advantageous to you.

Retirement Bucket #3:  Roth IRA

Unlike the traditional IRA, contributions to a Roth IRA are not tax-deductible.  Nonetheless, your investment grows tax-free and there is no tax on any money you withdraw. That means that you pay no tax on anything your investment has earned, which can be a significant savings.

One key mistake many investors make is to only contribute to their traditional 401(k) or 403(b) plan for their working years and not consider the other two buckets mentioned above.  An easy solution to part of this problem is that many retirement plans today offer the option of making both traditional and Roth contributions.  Make sure you take advantage of this option while still remembering that devising a three-bucket plan can give you great flexibility as you work to keep your money growing, and your taxes slowing, throughout retirement.


 “The risks in retirement are different from the risks an investor may have faced while accumulating retirement assets, and… a financial professional’s guidance can be of great help…”  —







Written by

Mark F. Kleespies, CFP®

Mark joined THOR in January of 1997, and is the head of the Wealth Management team. His primary duties include working directly with clients and strategically planning the direction of the firm. Mark is a member of the Financial Planning Association and is a Certified Financial Planner.

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