Pre-retirees have 3 "buckets of money": money, investments, IRA

For many pre-retirees, the biggest challenge is finding a way to preserve savings despite decades of minimal spending and earnings.

A couple who retired early devised a plan to separate their money into three proverbial "compartments" so that they never run out, the 59-year-old husband recently shared a message about the ESI Money personal finance blog. The man and his wife, who are 62 years old, have never earned a six-figure individual salary, but managed to retire two years ago with just over $ 1.5 million in cash and investments. They quickly sold their home in Florida and moved into their second home in the rural Smokey Mountains, he said.

"My retirement goal was $ 1,500,000, and I thought our investments should take $ 50,000 a year in 30 years of retirement," said the retiree, who owned and operated a residential cleaning service. "The balance of our income would then come from social security, about $ 34,000 for both of us." The couple lives on a salary for several years and saves at least $ 35,000 a year to achieve their goal, he said.

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"Our modest lifestyle plays an important role in our finances – we have never followed the Jones pace – we can not stress it too much," said the retiree. Nevertheless, the couple had to find a way to navigate the "transitional period" or the time between abandonment of work and access to Social Security benefits and retirement accounts without penalty. They needed enough money and did not want to spend their investments too quickly.

"I thought we needed three buckets of money for our retirement," said the retiree. "The first compartment would be a bridge between the first day of retirement and when we would be eligible for social security, it would also be a cash account to keep our monthly / annual allowance." They retired with about $ 274,162 in a cash savings account, he said.

"The second bucket will replenish the bucket one, so we still have 2 to 3 years of living expenses in cash," he said. This sub-fund includes their after-tax investment account, which had a balance of $ 207,490 invested in stocks and mutual funds at retirement. They also held nearly $ 130,000 in municipal bonds and savings bonds protected against inflation.

"While we were saving over the years, I've always focused on improving our after-tax accounts," said the retiree. "I did not want all our money stuck until we reached the age of 59. I did not have a specific plan for that money, I just wanted it to be I'm really glad I did. "

Finally, he said: "The third compartment is intended for long-term growth and will ultimately be used to fill in compartments one and two.Our IRA accounts represent the third group." When they retired two years ago, the couple had about $ 686,000 divided between a SEP IRA, a traditional IRA and a Roth IRA.

Using cash from their cash account and after-tax investments, the couple spent $ 55,630 last year – less than expected, he said. They have plunged into one of the IRAs, said the retiree, but they are slow to take social security for the moment.

"Do not focus on how much money you make.Let's focus on how much money you spend!" the man advised aspiring future retirees. "Be flexible, planning is essential, but life is unpredictable, always have a plan B."

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