For many retirees, the idea of retirement is synonymous with freedom. You can exercise that freedom by choosing to spend your days traveling, spending summers with the grandkids, or simply relaxing and taking it day by day without a harried schedule. However, the transition from a steady paycheck to a reliance on your own savings can be daunting. Without a clear strategy, the lifestyle you envisioned and saved for could be hard to maintain.
To help keep your summer plans and long-term financial health intact, it’s important to approach your retirement spending with both structure and tax efficiency in mind. The Carefree Retirement Income Model™ takes a goal-based, cash-flow-focused approach: first establish a predictable income floor for essential expenses, then give your remaining assets permission to work in the environment for which they are best suited.
The Income Floor covers essential expenses — housing, food, healthcare — with guaranteed income from Social Security, any pension, and if needed, an asset-backed annuity that fills the gap. Once the floor is in place, discretionary spending — summer travel, family gifts, special experiences — is funded from the investment portfolio using a time-segmented bucket approach.
A Quick Look at the Standard Withdrawal Options
The standard advice can often look like this: spend your taxable brokerage accounts first, then your tax-deferred accounts (like traditional IRAs), and finally your tax-free Roth accounts. However, if you haven’t made any withdrawals from your traditional IRA by age 73, Required Minimum Distributions could unintentionally push you into a significantly higher tax bracket. This could also affect your Medicare costs or increase taxes on your Social Security. Another drawback is that if you’d like to move your money into a new vehicle earlier in your retirement (when you still have taxable accounts you’re pulling from), this could also add to your tax burden, so drawing from tax-free sources that year could help balance that income.
The other piece of standard advice is the 4% rule — a classic rule of thumb designed to help you determine how much you can withdraw from your portfolio each year without running out of money over a 30-year period. While useful as a reference point, the 4% rule has an important limitation: it assumes you are funding all of your expenses from your investment portfolio. When your essential expenses are already covered by a guaranteed Income Floor, your portfolio only needs to fund discretionary spending, which gives you more flexibility and reduces sequence-of-returns risk significantly.
The Three-Bucket Strategy: Giving Every Dollar Permission to Work
For assets beyond the Income Floor, the Carefree Retirement Income Model™ uses a time-segmented three-bucket approach. The core idea is simple: separating money by the time horizon within which it will be spent gives each dollar permission to operate in the environment for which it is most appropriate.
- Bucket One (Years 0–3): Holds enough cash and near-cash to cover lifestyle spending — including that summer trip — for the next three years. Low risk because this money will be spent soon. It flows directly into your account where you pay bills and live your life.
- Bucket Two (Years 3–10): Targets returns at or above inflation. Not fully exposed to market risk because this money will be needed within the decade. During rebalancing, Bucket Two replenishes Bucket One.
- Bucket Three (Year 10+): Growth-focused. Fully invested for long-term growth. Not expected to be touched for at least ten years, which gives it time to ride out market cycles. The market temporarily goes down but permanently goes up — Bucket Three is built on that principle. During rebalancing, it replenishes Bucket Two, which replenishes Bucket One, and eventually flows into your pocket.
When you draw from the portfolio, you always pull from Bucket One. This means your long-term growth assets are never forced to liquidate at an inopportune time. You can also utilize a dynamic approach within this framework, allowing for larger discretionary withdrawals in years when markets are performing well.
However, moving assets between buckets can trigger unintended tax consequences if not coordinated with your overall strategy, so it’s important to consult with your financial professional about your goals and plans.
Why Planning Ahead in Pre-Retirement Matters
Thinking about where your income will come from once you stop receiving paychecks is something to consider sooner rather than later. Building your income plan out as many as five or ten years ahead of retirement can help you make some potentially impactful moves, such as:
- Roth Conversions: Moving money from a traditional IRA to a Roth IRA during lower-income years can create a pool of tax-efficient wealth. This also addresses tax risk — one of the seven core risks the Carefree Retirement Income Model™ is designed to manage — by reducing your exposure to rising future tax rates.
- Tax Diversification: Ensuring you have a mix of taxable, tax-deferred, and tax-free accounts so you can choose the most appropriate source of income each year for your specific goals.
- Avoiding the 59½ Trap: If you intend to retire early, making a liquidity plan can help you avoid the 10% early withdrawal penalty of most retirement accounts.
Your Summer, Simplified
We can help you focus on your retirement goals and navigate the complexities of tax planning. By establishing your Income Floor, organizing your portfolio into the right buckets, and coordinating withdrawals to manage tax brackets, you can confidently enjoy your summer plans without worrying about the math.
Successful retirees plan for both building and utilizing their savings. If you haven’t yet mapped out your retirement income plan, now is the time to have that conversation. Let us help you build a retirement that is predictable, sustainable, and genuinely carefree.
