The 3-Bucket Strategy to Balance Saving, Flexibility, and Retirement Security

Mastering Financial Freedom: The Three-Bucket Strategy for Coast FIRE

In this episode of The Retire Early Retire Now podcast, host Hunter Kelly, a certified financial planner, discusses the concept of Coast FIRE (Financial Independence Retire Early) and introduces the three-bucket strategy as a practical approach to achieving financial independence. Hunter explains the importance of balancing short-term security, mid-term flexibility, and long-term retirement independence through the use of three distinct financial buckets: the emergency fund, the brokerage account, and retirement accounts. Each bucket serves a specific purpose, from providing immediate financial security to offering flexibility for early retirement or career changes, and ensuring long-term financial stability. Kelley also shares real-life examples and emphasizes the importance of planning and structuring investments to meet Coast FIRE goals while maintaining financial freedom and security. Listeners are encouraged to leave a five-star review, share the podcast, and reach out to Kelley for personalized financial advice.

00:00 Introduction to Coast FIRE
00:40 The Three Bucket Strategy Overview
02:51 Bucket One: Emergency Fund Essentials
08:24 Bucket Two: The Flexibility of Brokerage Accounts
13:12 Bucket Three: Long-Term Retirement Accounts
17:42 Integrating the Three Buckets
18:51 Conclusion and Final Thoughts

Check out the Palm Valley Wealth Management Website
PalmValleywm.com

Check us out on
Instagram
LinkedIn
Facebook
Listen to the Podcast Here!
Apple
Spotify

Transcript

0:00

And welcome back to The Retire Early Retire Now podcast. I'm your host, hunter Kelley, certified financial planner and founder of Palm Valley Wealth Management. Over the past few weeks, we've been diving into this idea of coast fire. So Coast financial independence retire early, where we are finding that happy medium between. saving as much as we can early on to become financially independent and, having a later retirement coast fire is gonna, can allow you to do the things that you want to do. Set yourself up for a timely retirement, but balance that here and now as well. And so we've talked about. What it is, how to calculate it. And today I want to wrap it all together with some Practical strategies, what I like to call the three bucket strategy. and talk about the accounts that matter most, that help you, reach your coast Fire number, but also, can help you throughout your financial journey. So this strategy will help you balance the short term security. Midterm flexibility and long-term retirement independence because hitting, your retirement number or your coast fire number isn't just about growing your investments. It's about making sure those dollars are structured the right way. But before we jump into it, go ahead and leave a five star review on your favorite podcasting app if you're loving, these episodes. And if you know someone that would find this episode. Interesting or helpful. Go ahead and share this with that friend as well. And if you're thinking about your own situation, you're, you're unsure on where to go next. Maybe you've had some success, you've saved some money, but you don't understand how all this works together. Or maybe you don't have time to put a plan together. I would love to have a conversation with you. And the best way to reach out to me is through my website, Palm Valley wm.com. I would love to have, again, have a conversation with you and see what I can do. To help, but let's jump right in. So here's the reality. All of your money is in if, if all of your money is in retirement accounts, you're rich on paper, but you're handcuffed until you're about 60 years old, if all of your money is in a checking account. You've got liquidity but no growth. The three bucket strategy balances both of these extremes. Bucket One gives you protection for today. Bucket two gives you flexibility for tomorrow, and Bucket three gives you security for the future. All three work together to maximize your financial journey or your coast fire. Journey. And so what we're gonna do is we're gonna break down each bucket, and talk about some practical ideas on how to maximize these buckets and tie'em all together to help you, meet this idea of coast fire, or hopefully use it, in a way to help yourself financially. And so. Bucket one is your emergency fund. You hear a lot of financial gurus, financial advisors talk about the emergency fund, but it is truly, I think, one of the most important funds or accounts that you can have, because we just never know when life is gonna life. Life is gonna happen. and we wanna be prepared for those times and need, when we need that cash and we don't have to wreck other accounts to, to meet those needs. Right? And so, the purpose of this account is purely for financial safety net for a financial safety net. So how much money do we actually want to keep in this account? The general recommendation is three to six months worth of your expenses. and that is not your extravagant expenses, that is bare bones, rice and potatoes type of expenses. so. A lot of times this is going to be, a little bit less than what you would typically spend in a month, but if you had to tighten it up for a few months because of the loss of a job or extra expenses for whatever that reason may be, then you could certainly get by three to six months worth. but the right. Amount, obviously depends on your situation. Some things that you want to consider first and foremost is your health, so health, insurance, coverage and deductibles. So what's the the most damage that can happen at one time? From a financial standpoint, if I need a surgery, need to go to the emergency room or have some sort of health issue, or concern that, that I'll have to pay for out of pocket, right? we wanna make sure that that is covered. first and foremost, the next thing you want to consider is the consistency of your income, if you're commission-based or self-employed, where your income is fluctuating. You may want to tend to have a little bit more in savings. The other side is if you're a consistent W2 wage earner, you may be able to get away with three months worth of expenses, right? And so, again, all this number is gonna be very personalized based off your situation. the other things you may wanna forecast is if you're living in like an older home. And you know that there's, a higher risk of home repairs or things of that nature, or just family dynamics in, in general. So, are you, a caretaker for a parent or, a family member that that has extra cost to that, whatever that may be for you? Consider those different factors. And so, I'll give a story, right? I have a client that I work with, we'll call them Sam and Ben. And, they've been working with me for a few years now, and they're on, they, they do great. They, they've saved well, they've, they've invested well. They just want the peace of mind of having that sound, financial advice to help them, hopefully one day retire early. Right? And so they're on track financially and luckily, have a. Fully funded emergency fund. And out of nowhere, not out of nowhere, but they had been trying to conceive a child, right? and so for like a lot of people, that doesn't always come easy, right? And so they, they, face the, reality of having to go. To see a specialist, to, start to perceive treatment for things like IVF and, and, trying to have a baby, trying to conceive a baby, right? And so with that treatment comes more cost. And so that wasn't something, they had planned, to, to do. And so that was not necessarily, imminent unexpected expense, but it was, unexpected expense. So what expects to have to go, through, IVF and things of that nature. and so that was something that weren't planning on spending right? And so, because they had a fully funded emergency fund, it was easy to give them the advice to say, Hey, let's go ahead, let's just use this money to fund, whatever costs is needed to go ahead and, and make sure that we can get the treatment that we need to, to be able to conceive a child, right? And so it doesn't always start with the, the most, Advanced treatment, right? You have to go through stages, of, fertility treatment and things of that nature. And so, that can be a long process and a very expensive process. And so luckily for them, they were able to use their emergency fund over a several month period to fund this. and then over, once that particular expense was done, over a six month or a year period, they were able to re replenish that emergency fund. And so, the moral of the story here is that they were able to fund IVF because they had an emergency fund, for this type of stuff. While it's not necessarily a traditional or emergency that you would think of like having to go to the hospital for emergency surgery or something like that, it was something that was certainly unexpected. and they had not planned for, at least long term. Right? And so. this is what the power of this emergency fund bucket will do. It will allow you, immediate flexibility so that you can handle, unexpected expenses. Even, something like, fertility, treatments and things of that nature. So, this will help you stay on track for your long-term goals without having to go into 401k loans and, and. credit card debt and, and reaching into other accounts that maybe you already had designated for something else, right? And so again, the emergency fund, can give you that access, that extra security blanket, if you will. And so. Bucket two. Bucket two is your brokerage account. I talk about this a lot throughout my podcast. it is going to give you the ultimate flexibility. some people call it the flexibility bucket. another colleague of mine, that does a podcast, called the Early Retirement Podcast, he calls it the Superhero Account. this is going to give you the most flexibility. And so the purpose of this bucket can be a, a lot of things, but a lot of people use this to bridge, between now and retirement age. And, and, and how you bridge again, is gonna look personalized and different for each person, but it gives you the freedom to make choices before your 59 and a half. So if you wanna retire early, if you wanna slow down work, if you want to change your career, if you wanna start a business. this can be that bridge to those gaps, because it's not tied to retirement. You don't have to wait until you're 60. There's no penalties for taking out of it. Yes. Are there extra taxes potentially, in these accounts or you're not getting the deferred tax when you contribute to this? Yes. But, you do have more flexibility within these accounts. So, why it matters. there's no penalties for withdrawals and unlike retirement accounts, right? And so a couple scenarios that I wanna go over, that can be useful for this brokerage count, right? So career change or pivot, right? If you are someone in your early forties, maybe you're burnt out, from your medical practice or law practice or, or whatever corporate job, you may have a well-funded brokerage account. Gives you the freedom, to shift into more fulfilling, low paying career or lower paying career without worrying about an income gap. So, maybe you've, you've been used to making three, four, or$500,000 a year, but you take the time, you diligently contributed and invested inside of a brokerage account, to the point where I know that I have enough where I can make some sort of income. maybe half of the income that I used to make, and be able to supplement, my expenses throughout the years until I'm age 60, where I can start taking from retirements. and, and I don't have to worry about continuing to make four or five,$600,000 a year, because, Because I have this brokerage account and so this can help with that burnout, right? Knowing, having that peace of mind that I have funds in an account that I can use, to make a career change or even slow down, in my work so that I don't feel as burnout and I have more time with family or doing hobbies, traveling, whatever that may be. The other scenario is starting a business, right? so I've worked, I've worked with professionals who want to start businesses, right? So whether it's a medical practice, a law firm, I have a couple friends that, completely got outta the corporate world and. Or doing their own thing, whether it's, remodeling business or product sales, whatever that may be. this brokerage account can and was a way to cover their living expenses until the business. Got to, to a point where they could sustain their, their lifestyle that they were used to. Right? And so generally, you have to take a look at, okay, well how long of a runway do I need, to start this business, right? So is this a business so that I can get up and running, within six months, about three months, or is it a three, three year deal? and this would, help you. Determine how much do I need in this brokerage account to help fund this along the way until I can replenish the income that I'm walking away from in my corporate job or my previous career, whatever that may be. And then lastly is, is probably the most common, if you're wanting to retire early, and that is just using, the brokerage account to supplement, an early retirement. Let's say you retire at 55 or even 50, and you have. Certainly, a large percentage of your wealth in your 4 0 1 Ks and IRAs and things of that nature. But again, it makes as it could be more difficult to access those dollars because of the retirement account rules of 15, nine and a half. Well, this brokerage account, it's gonna let you bridge that gap, from. Let's say 55 to 50, until you can start touching those, accounts, without penalty. So this bucket is your freedom bucket, right? I, I like the term of that. everybody likes freedom. Everybody likes choices and options. this bucket gives you, that freedom. So it gives you options when you want to shift gears in life, whether that's a career change, starting a business, or just have an early retirement. And, and so that's what this bucket is for. Bucket number three is your traditional long-term retirement accounts. This is the one that most people think about, I would say is obviously the most popular. you can contribute to these accounts a number of different ways, whether that's through 4 0 1 Ks, 4 0 3 Bs, traditional IRAs, Roth IRAs, and even, health savings accounts as well. And so this is the engine that. Fuels that retirement or life after 59 and a half. And so why do they matter? advantaged These accounts carry tax advantages and can compound over decades growing into the backbone of your retirement. These are going to do the heavy lifting when you get into your sixties, seventies. In eighties. And so we wanna make sure that we're contributing to them not only for, tax purposes, but also to help carry you through, the last stages of your life, right? And so the 401k backbone. Is, a, whatever your profession may be. So lemme give you some scenarios here. the 401k backbone, a physician maxes out their 401k for 20 years and ends up with seven figure portfolio in their fifties. That consistency builds the foundation for a coast fire plan, right? And so the good thing about 4 0 1 Ks is that there is a large contribution limit, right? So, as it stands today. About 23,500 plus whatever your employer is matching generally. and so if you're young still right now, you're in your late twenties, early thirties, you can really shove money away in this account. Be fairly aggressive with it. and that can be. Again, a way to start building toward that Coast Fire Plan, right? So getting enough money in your retirement accounts that you can pull back on that savings rate, let's say in 10, 15 years, and increase your cash flow. Maybe have a partial retirement then, and then knowing that your 401k is gonna carry you, when you're in your sixties or seventies, right? The next, account that most people utilize or have heard of, is the Roth IRA, right? So especially if you're younger, you want to contribute to this because one, theoretically you may be in the lowest tax bracket you may ever be in, and you're gonna put these Roth dollars in after tax is gonna grow tax deferred, and it will be tax free. Later on in retirement. So by retirement, they, you may have a tax free growth bucket, that gives you flexibility to manage your taxes, be able to make large purchases without having to pull out of traditional IRA or traditional 401k dollars and making your tax bracket go up, and things of that nature. Or it could just be a great, way. For you to plan for, your, your giving to, your heirs and, and things of that nature. And then lastly, one, account that most people don't think of as a retirement account, but it is the secret weapon, and that is your health savings account. you may have a high deductible plan. You may be, Contributing to a health savings account. but if you have the cashflow now, it may make more sense to go ahead and cashflow those expenses, hold onto those receipts or those invoices that you have paid for your medical expenses and continue letting that money grow. You can always reimburse yourself later on down the road, even if it's 10, 15, 20 years down the road, letting that money grow. And then when you get into your sixties, specifically 65. You would able be able to pull that growth out of that account, you would pay taxes on it, because you put that money in tax, deferred, but be able to use that for retirement. So if you can build that to, a couple hundred grand, that can be a significant, retirement bucket you would not have had anyways. Right. And so, Utilizing the HSA can be that secret weapon to, maximizing your retirement later on down the road. And so, these are the three buckets, right? So this bucket, this bucket is your finish line. Fun. It is not designed for flexibility in your forties or fifties. it is designed to guarantee that when you finally stop working, you can do it with confidence in security. So here's how the buckets work together. The emergency fund protects you today. The brokerage account gives you freedom tomorrow and the retirement account secures your future. Together, they create balance. You won't panic when life throws you curve balls. You'll have options if you want to pivot careers or scale back work, and you'll know retirement is waiting for you when you're ready. So here's a practical example. let's put this into numbers. Let's say you're in your late thirties. You've got$50,000 in emergency fund covering about six months worth of expenses since you're self-employed.$200,000 in a brokerage account, which you plan to use. If you change careers in your forties, you have$500,000 in your retirement accounts growing steadily toward multimillion dollar nest egg by age 60. That's balance You've built, security, flexibility, and a future. Exactly what the three bucket strategy is designed to do. So that's the three bucket strategy. Maximizing your coast fire journey. First, build your emergency fund. Second, focus on. Your brokerage account for flexibility. And third, keep fueling that long-term retirement account. Remember, coast Fire isn't about quitting work tomorrow. It's about giving yourself the freedom to live better today while knowing your future is still secure. If you found this helpful, please share this episode with a friend. Who's thinking about their financial future? And if you've been enjoying this podcast, please leave a five star review on your favorite podcasting app. Really helps more people find these conversations. And as always, If you want help figuring out your buckets and how to balance them, head over to my website, Palm Valley wm.com and schedule a call with me. But until next time, keep planning with a purpose. This podcast is for educational purposes only, is not meant to be financial or investment advice. please do not make decisions solely based on this podcast alone. Please seek professional help when considering your own situation.