What is the Three Bucket Strategy?

When it comes to wealth management, creating a resilient and adaptable financial plan is important for long-term success. At Southside Bank, we believe in empowering our clients with strategies that provide flexibility and control, especially as they navigate retirement and build lasting wealth. One approach our advisors often advocate for is the “Three Bucket Strategy.” Here’s a closer look at this strategy, its benefits, and why it might be a valuable addition to your financial plan.

Laying the Foundation of a Strong Financial Plan

Wealth Management & Trust President Bill Newburn says that before focusing on a Three Bucket Strategy, it’s important to build a solid financial foundation. This foundation includes:

• Establishing an Emergency Fund: Ensuring you have funds set aside for unexpected expenses. Typically, this is 2-6 months’ worth of expenses in a savings account during your working years.
• Paying Off High-Interest Debt: Clearing debts with rates above 6% to reduce financial strain.
• Setting Up an Estate Plan: Protecting your legacy and ensuring your wishes are honored.
• Purchasing Life Insurance: If you have someone dependent on your income, you may want to purchase life insurance to protect them. Bill recommends purchasing term insurance at 10-12 times your income as a good rule of thumb.

With these basics in place, you’re better positioned to start building wealth.

Breaking Down the Three Buckets

Once you have the foundation of a healthy financial plan in place, you can focus on accumulating wealth through a Three Bucket Strategy. This strategy is designed to provide flexibility by distributing wealth across three different types of accounts. Here’s how each bucket works:

1. Roth Account: This is often seen as the “best of the best.” You get no tax deduction on your contribution, but any withdrawals in retirement are tax-free. However, Roth accounts come with annual contribution limits, so maximizing these contributions is key. Many employers offer a Roth 401(k) which is a great way to fund this bucket. Typically, the best candidates for this bucket are those just starting out in their career or who have an effective income tax rate of less than 30%.
2. Traditional 401(k): Typically, this bucket is associated with employer contributions and offers tax-deferred growth, meaning you pay taxes upon withdrawal in retirement. The tax deferral benefits can help your money grow faster, but you’ll want to plan for future tax obligations. Aside from your employer match (which everyone should participate in), good candidates for this bucket are typically individuals who have an effective income tax rate of 30% or higher.
3. Taxable Investment Account: After maximizing Roth and 401(k) contributions, the taxable bucket is a great option. Unlike retirement accounts, it doesn’t have contribution or age limits, allowing flexibility. Investments in this bucket are ideal for goals outside of retirement and are accessible without penalty.

Why Use the Three Bucket Strategy?

One of the main advantages of this strategy is its flexibility, particularly when it comes to managing taxes in retirement. The Three Bucket Strategy lets you manipulate how much tax you’re going to pay in the future. With tax rates likely to rise, having tax-efficient options can help you control your taxable income in retirement.

The strategy also allows for adaptability to market conditions. You can decide where to place different asset types, such as keeping taxable bonds in tax-deferred accounts or equities in taxable accounts, allowing for a more strategic allocation. This approach ensures that your portfolio remains balanced as you age, helping you mitigate risk.

Customizing the Strategy for Your Goals

The Three Bucket Strategy can be tailored to meet specific financial goals. For example, individuals focused on early retirement will want to build up their taxable account in order to have accessible funds before the age of 59 ½ (you will be penalized if you withdraw funds from a traditional IRA account before this age).

For charitably-minded people, Qualified Charitable Distributions (QCDs) from traditional IRA accounts can create tax benefits while supporting causes that matter to them (keep in mind, you are only eligible to utilize QCDs from your traditional IRA at age 70 ½ or older).

A Partner in Wealth Management

Bill says, “Complexity follows wealth.” As clients accumulate assets, financial planning becomes more complex, and having a trusted wealth management team is invaluable. Our advisors conduct in-depth assessments and analyses to evaluate retirement income, asset composition, and allocation. This calculated planning helps us achieve a high probability of success for each client’s unique goals.

At Southside Bank, we believe in providing proactive, clear advice. The Three Bucket Strategy is just one of the ways we help clients manage their wealth effectively, no matter the financial environment or stage of life.

Ready to discuss how the Three Bucket Strategy could benefit your financial plan? Contact Southside Bank’s Wealth Management & Trust team today. We’re here to help you build a plan that supports your goals and adapts to your future.

The information provided in this article is for general informational purposes only and should not be construed as financial advice. Before making any financial decisions, it is strongly recommended that you consult with a certified financial advisor or another trusted financial professional to assess your individual circumstances.

We want you to know that investment products provided by Southside Wealth Management & Trust: Are Not Insured by the FDIC or Any Federal Government Agency | May Lose Value | Are Subject to Risk | Are Not Bank Guaranteed | Are Not Deposits