In our previous articles, we introduced the Buckets and Tools Approach to Retirement Planning. In essence, we categorize each dollar available for retirement among the four necessary priorities of liquidity, income, protection risk, and growth.
Once we have all of our assets into the right buckets, how do we decide which strategy works best to achieve liquidity, create income, protect from risk, and grow our assets?
In other words is there always a single best tool to cover my income gap? Is there a single best tool for growth? Is there always a best account type to put my dollars for liquidity?
The answer is “no”. There isn’t a single best tool for every single person for each type of priority or bucket. The reason is that every single person has different priorities and is willing to make different trade-offs.
Let’s give an example in the Income Gap Bucket….
If I need to cover an income gap between predictable retirement income and predictable retirement expenses, I have many options, strategies, and tools to choose from. Which one I would use is going to depend on what I value the most and what I most willing to trade off.
If I value security and guarantees the most, I will use the tool that is guaranteed to produce income as long as I live in regardless of market performance, such as an annuity. In order to use this tool, I must be willing to trade off giving up the use of these premium dollars, since I won’t be able to use them for anything else. I also may have to give up some liquidity and some pass on value to my heirs for these dollars. If the tool meets my priorities and I’m willing to live with the trade-offs that I lose, it becomes the best solution.
If I value getting the most income possible with the least number of dollars, I may use First Trust Deeds (as an example) to cover the income gap. In order to use this tool, I may have to give up absolute guarantees provided by an insurance company. If I’m willing to make this trade-off, this becomes my best solution.
There are no good tools or bad tools just as a saw or hammer or screwdriver isn’t good or bad. Each tool is either appropriate or inappropriate according to my priorities and what I’m willing to give up.
That is why dividing my money among these various buckets is so critical, so that I use the right tool for the right purpose.
If you have any questions, please feel free to contact me.