We believe there are three distinct taxable buckets you have the option of investing in for retirement. We’ll talk about how to balance those buckets by age and show a case study by age that shows what your buckets may look like!
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Building wealth is a goal that everyone wants to accomplish, but it can be challenging to determine where to start. Many people fall into the trap of simply saving money without having a plan in place for how that money will work for them. The 3 bucket strategy is a tried and true method for accomplishing financial goals and building wealth at any age.
The 3 bucket strategy divides your financial resources into three categories: short-term, mid-term, and long-term. Each bucket is allocated a different portion of your overall financial resources, and each serves a specific purpose. The idea behind this strategy is to allocate your resources in a way that optimizes your returns while minimizing risk.
For those under the age of 30, the 3 bucket strategy may look a bit different than it does for those in their 40s and beyond. Let’s examine each bucket at each age group.
Bucket 1: Short-Term Savings
Bucket 1 is designed to hold your short-term savings. This includes things like emergency funds, vacation funds, and other expenses that you anticipate within the next few years. For those in their 20s, this bucket should hold up to 30% of your overall financial resources. This will give you the flexibility to handle financial emergencies without having to dip into your long-term savings.
Bucket 2: Mid-Term Savings
Bucket 2 is for mid-term goals like a downpayment on a house, a big vacation, or a vehicle purchase. This bucket should contain up to 50% of your overall financial resources for those under 30. However, you must be careful not to take too much risk, as these are still short-to-mid-term savings.
Bucket 3: Long-Term Savings
Bucket 3 is the most conservative of the three, as it’s for long-term savings goals like retirement, education expenses, or starting a business. This bucket should hold 20% of your overall financial resources at under age 30. Remember that the longer your investment horizon, the greater the risk you can take. Consider investing in stocks through an S&P 500 index fund, which have historically generated returns of 7% annually over the long term.
No matter what age bracket you’re in, the 3 bucket strategy is an effective way to build wealth and reach your financial goals. By allocating your resources in a strategic way, you’ll maximize your returns while minimizing risk. The approach shifts as you age, but the strategy remains effective throughout each decade of your financial journey.
It’s always a good option to keep some stocks. Well with current market situation and everything at stake with the present economy, I’d say we're better off the markts for awhile, or better still seek expert counsel.
While I love this show and appreciate all of the content, this example seems out of the ordinary.
– I do understand you preface this with a the sample set being a financial mutant. But, starting at 25 with a 50k salary and ending with a 350k salary is quite the swing.
Also, an HSA is tough outside of your 20's. I wish I could still contribute, but the HD plans are horrible. As soon as you have kids, 1 medical issue, etc… it is no longer cost effective.
The maket trend can turn around very quickly. In fact, the indexes often switch from a bear market to a bull market when the news is at its worst and the mood of investrs is at its lowest point. I read an article of people that grossed profts up to $150k during this crash, what are the best stocks to buy now or put on a watchlist?
Was Manny renting an apartment for the whole 40 years? I feel like a paid off house could add in another 300k to 500k into the net wealth statement, as well as reducing monthly expenses once the home is owned outright.
As exciting as you guys sound for Manny having 6M at 65…how do you guys feel about Mannys average life expectancy of around 75…he has about 10 years to enjoy that 6M.
Did I hear them correctly that young savers should focus on the Tax Free bucket as much as possible until getting into a >30% tax bracket?
I am currently about to turn 34 making 90k salary so am in the 24% tax bracket … my employer offers a roth 401k option.
Should I be prioritizing this bucket IN ADDITION to my separate Roth IRA and only put money into the tax deferred bucket once I get more pay raises and get into the >30% tax brackets?
Someone please chime in and thanks!
If factoring in inflation, Manny's $352K salary is equivalent to $107K today, does that mean his $6.4M investment is equivalent to $1.9M today?
At the first glance, I thought 5% annual salary increase rate is not realistic because in usual we only get 2% annual pay raise. However, after calculating my own salary growth I find it is accurate. I happened to start my career at 25 years old and earned 50K that year. This year, I just hit 40 years old last month, my gross annual salary is 91K + 5% bonus and the total gross will arrive at 96K. I haven't changed my employer in the past 14 years, I got promoted for two three times though and the salary got jumped a lot in these promotion years even though in other years I did receive only 1-2% pay raise. After calculating my own numbers, I find 5% annual compound pay raise is still reasonable.
I'm really glad I found you guys! I'm 35 and plan on retiring in my early 40's, but I had no idea up until about two years ago about the logistics of how that would work. I realized from your content that the after tax bucket is my 'liquidity bridge' to 59.5.
This is an awesome case study, I would love to see something similar for military finance. In my experience, many service members overestimate their pension and use it to excuse financial irresponsibility. So having an easy to digest case study would probably help thousands of people!
50k at 25 is not the average, but assume that Manny is actually a couple and the numbers feel far more "average" and "attainable"
I recently made more purchases. Saving money for a market downturn is likewise a bad idea. There are numerous ways to look at recessions and depressions, we cannot always expect to make large returns, and taking chances is better than doing nothing. The bottom line is that you will achieve remarkable results by diversifying your portfolio and making wise decisions. My portfolio's raw earnings rose by $608k in just 5 months
$50K a year with 5% pay raises every year sounds like a dream. $50K is well above the median salary where i live, it usually takes a bunch of years of experience to get to the median salary of $44K.
My portfolio has good companies, however it has been stalling this year. I’ve approximately $700k stagnant in my reserve that needs growth, any suggestions to grow my portfolio will be highly appreciated.
I don't know who needs to hear this saving for a better investment is a great step to financial freedom you're saving a day off work
I didn't start making money that early in my life.
In my 25 year corporate career as a cpa, I’ve had 6.1% compound annual growth rate on my compensation, this includes promotions and incentive compensation, but I have not experienced the rates of return modeled for Manny, my returns average less than 7% over the last 25 years, partly due to poor 401k options I guess
I don’t get why Manny is still doing Roth 401k in his 30s/40s…but it may be close to a wash at that point
I’m 35 and top of 22% bracket, and it feels like a wash as most of my funds will probably be deployed at 12% in retirement (and certainly not higher than 22% unless there are increases).
This is the dream scenario so you need the other 2 D’s illustrated. It’s motivational to see how good it could be, and it can be reassuring to see it can still work out even if things go a bit sideways
I'd love to hear one of these when you start investing at 40,45,50 etc. I'm in my mid 30s but won't be out of debt until 40 and wondering what retirement could look like for me.
How does LTC factor into the bucket strategy? One thought is that if I load up my pre-tax bucket (and invest tax savings in a roth), I can avoid paying for an expensive LTC policy since when I eventually start paying for LTC ($2 million x 5%= $100k ltc payout) it will count as a medical deduction and not be taxed at all (or very little)
Must be nice to get a 5% increase every yr….