What The Wealth Retirement Podcast

The 6-5-4 Strategy: Creating Your Retirement Paycheck (108)

• Jonathan Bednar II, CFP • Episode 108

Share episode

The 6-5-4 bucket strategy can transform your retirement savings into a sustainable income stream while maintaining long-term growth potential.

In today's epsiode I dive into this on more detail: A simple yet powerful approach that creates a clear withdrawal plan that provides both financial security and peace of mind during market volatility.

• Calculate your retirement income needs 
• Set aside living expenses in an emergency fund
• Five years (60 months) of income needs in a second bucket 
• Invest the remaining portfolio for growth

If you want to learn more about how the 6-5-4 strategy may apply to your situation, reach out directly for personalized guidance.


🗓️ Meet with me: https://paradigmwealthpartners.com/begin-your-journey/#calendly
↔️ Connect with me on LinkedIn: https://www.linkedin.com/in/jbednarii/
🌐 Paradigm Wealth Partners (website) – Financial planning for career professionals who want to retire and stay retired: https://paradigmwealthpartners.com/
🌐 What the Wealth (website) – Adding clarity to difficult financial topics: https://whatthewealth.com/
▶️ YouTube: Paradigm Wealth Partners

If you or someone you care about could use the help of a financial advisor and sees the value in establishing a financial plan, please reach out to me.

Thanks for Listening!

Jonathan

Speaker 1:

How do you turn your retirement nest egg into a retirement paycheck? Today I'm going to talk about the simple bucket strategy we use at Paradigm Wealth Partners to create your retirement income strategy so you have a comfortable and confident way to withdraw money from your account and to use that for your retirement income and still be able to have money invested in the market for long-term growth. So we're going to walk through that today. And really this idea came from a good friend of mine, nick. Nick's also a financial advisor. Great friend, great person, and you know I had been already doing a bucket strategy a bucket strategy very, very similar. But over the years that I've talked to Nick, his strategy that you know we'll talk about today really kind of took hold of me and made a ton of sense and as I started to use it with clients, they began to really become more at ease with their investment strategy, their income strategy, and gave them more and more confidence to have the ability to go into retirement or through retirement with that confidence. So today we're going to walk through this strategy. This strategy is called a 6-5-4 strategy and it's really really simple. Again, I think it provides a ton of clarity for clients that we've worked with here at Paradigm Wealth Partners, and so today again I'm going to walk you through it. So the first step of this process is to identify what your income needs to be in retirement. So this is great for someone that is five years or less from retirement and you're really trying to dial in what that looks like for you. So as you go through this process of writing down what you think it costs, you know maybe you still have a mortgage, you have car payments, you need to have money for vacation and gifts and travel and spending time with your family and your grandkids and whatever those things are write them down. Come up with that estimated budget. Another way to look at this is maybe 80% of your current take-home pay or salary, something like that, but some ballpark estimate of what you think it's going to cost in retirement. So let's assume that that's $8,000. And we're not going to account Social Security and any pensions in this calculation. So well, actually, what we're going to do is we're going to subtract the money that you get from pensions and Social Security from your figure. So let's just say you and your wife both get $1,500 a month in Social Security. There's no pension, so that's $3,000 covered of the $8,000, which means we need $5,000 a month from our investment portfolio. Let's assume that you have a portfolio of around well, let's say $1.5 million to make this easy. So if we have $5,000 a month, that is an income need from your investment portfolio times 12 months. We know we need $60,000. That's an important key to remember as we go through this process.

Speaker 1:

But I wanted to kind of set that up for this bucketing strategy. So the first strategy we need is the six of the 654 method. The six stands for six months of an emergency fund. This may be a high yield savings. This may just be in a money market account, this may just be in savings at the bank, not earning anything, but this is money that you can easily get to if something happens. It's the standard emergency fund that everybody encourages I say everybody, most people encourage you to have. So that stands for the six.

Speaker 1:

In this case, if we need that $5,000 a month from our income, from our portfolio times that six months, the six should have that bucket. The six month emergency fund bucket should have $30,000 set aside. This covers, again, any of those things that come out of the blue, anything that pops up that you may need AC repair, new tires, what have you? Anything that's not budgeted? So that is the six. The five is five years of fixed income set aside for those living expenses. So again, if we need $5,000 a month for 12 months in a year, $60,000, we need that for five years. This bucket will then have $300,000 set aside in that five-year bucket.

Speaker 1:

Now I personally also like to say 60 months here. That's also five years, but it gives me the ability to talk with clients and potential clients and give them the confidence and the clarity to say, even though the market's wild, a lot of this conversation came up during these most recent tariffs and conversations around trade wars and geopolitical issues that have been taking place over the last several months. And so, as I'm having these meetings with clients and reviewing these conversations with clients, I'm reminding them. You know, we have 60 months in that five-year bucket, in that war chest. That gives us plenty of time to continue to kind of weather this storm and not make panic decisions based on what the market's doing. That has helped people tremendously in feeling like, okay, I don't like what's going on, but I can at least take a deep breath, sit back, not making the irrational decisions and know that for the next 60 months five years my income of $5,000 a month has already been set aside by Jonathan and the Paradigm Wealth Partners team. Because of that foresight, of having this bucket strategy and having the plan in place to know volatility will come. We'll have these spikes where uncertainty comes about, market gets haywire and gets wonky and I'm in a position where I don't have to worry day to day. I don't have to look into my account day to day and be concerned about what's going on Now. It may not feel good, but my income is already set aside for the foreseeable future, and so I think that that really again helps provide that clarity and confidence.

Speaker 1:

Some of the questions I get on this sometimes is you know, why are you only doing? You know, why are you not doing two years or three years or 18 months? You know why are you doing five years? And the reason is because I don't know what happens, what if we have three years of significant downturns, or four years, or you know? It just provides what I found a lot of uncertainty and knowing that. You know the average bear market lasts somewhere around two years.

Speaker 1:

So we've got, you know, two and a half times that set aside for, you know, these turbulent times, and so, more than anything, I think it just provides extra buffer, extra clarity, extra comfort, knowing that this money is set aside. So you know, is there a secret sauce to why you know we've picked five years? Not necessarily. It's just been our experience that, you know, one in two years clients still feel antsy and jittery about do I have enough? What do I need to do? Should I sell? And that just causes extra emotions and stress and those can lead into unforeseen health issues because you worry about this so much. And so we have just felt like that. Five years is that really good bucket to know? Okay, I've got plenty of time to weather these storms. The third bucket is called for growth. So six, five, the number four growth. So we're investing the rest of the money for growth.

Speaker 1:

People are living longer, medicine is getting better, technology is getting better, people are living well into their 90s. I've had clients that were in their hundreds, and so it's important that you have a strategy to harness the power of compounding over time and staying invested and staying true to you know, those beliefs and those roots that you know we'll probably get through this. It's not comfortable now, but we'll probably get through this at some point and then, you know, as we stay the course, we're rewarded for that. I'm reminded of Warren Buffett's. One of his favorite quotes is you know, his favorite holding period is forever and he is a really strong supporter of owning equities in portfolios so that they can do the heavy lifting and provide growth in your investment portfolio to provide for those later years, those 20, 30, 40 years from now, depending on when you retire and how long your retirement looks like.

Speaker 1:

Buffett's got a lot of wisdom. He just recently announced that he was going to step down at the end of 2025, at the age of 94, because he felt like it was time to turn the reins over of Berkshire Hathaway to, you know, another group of leaders who he has trained, who he has kind of brought under his wing and and coached and mentored, and I think some of this is probably Charlie Munger passing away recently and kind of him losing his sidekick and I think he's mentioned he's starting to feel his age, but Warren Buffett is a person that has tremendous investment acumen and is a great thought leader for advisors and people and investors as a whole, and so you know, going back to that for growth strategy. You know, thinking about how much equities can do for you over that long time period. And of course there's no guarantee. They go up and they go down and they fluctuate and things get wonky and haywire. But over time if you're true to what you, you know your beliefs, you're true to your convictions, many times you're rewarded for you know that holding period. And so again, you know Warren Buffett's quote of my favorite holding period is forever. You know, just sticks with me as I think about having this bucket strategy for retirees and people moving into retirement.

Speaker 1:

So again, a quick recap on the 6-5-4 bucket strategy. Super simple. Again, we use this at Paradigm Wealth Partners for our clients as we're building out our one-page wealth plan for you. This easy one-pager shows you in kind of 15 minutes where you're strong, where you're weak, and one of the things that we put on there is this the six, five, four strategy. So six months emergency fund of living expenses set aside. So in this case of 1.5 million, they need $5,000 a month from their investment portfolio. That six month bucket has 30,000. Investment portfolio that six-month bucket has $30,000. The five-year or 60-month middle bucket has again $5,000 a month for 60 months, $300,000 set aside in this bucket for your next five years of living expenses. The remainder of the money, again in this $1.5 million example we used, would be $1,270, I believe my math is correct on that in the bucket for growth. And so this is what helps us continue to grow and harness the power of compounding.

Speaker 1:

So what happens when you know we've used two or three or four or maybe all five of those years of that middle bucket for the income and we've let the market grow? Well, as that five-year bucket dwindles, we will replenish it from the four growth buckets, so maybe 2023 and 2024, the markets did really really well up 20% both years. And so I say the market we're talking about the S&P 500, which can't be invested in directly. This is for compliance here, but there are other options to invest in things like these indices that mirror the indice, if you will. And so if the market's up significantly, we might rebalance early to take some of these profits off the table and kind of refill that five-year bucket. If the market's down, we might withdraw that all the way down to give us time to let this market recover out of the doldrums that we saw, you know, like we've seen in late March and early April.

Speaker 1:

And so, again, what we found at Paradigm Wealth Partners is this is an excellent strategy, is it? You know the end all be all? No, are there other options and withdrawal strategies out there? Yes, but what we found is this strategy really helps combat one of the five big risks that I think is out there for retirees, which is sequence of returns. And when you have that five-year bucket, that 60-month bucket to withdraw, you know, have your withdrawal strategy, how do you turn your nest egg into that paycheck really provides provides the clarity, the confidence, the comfort to know you have a solid plan in place on paper, on purpose, specifically for you. So, again, that's how we do it at Paradigm Wealth Partners the 654 strategy. If you want to learn more, you want to know how this may apply to you, reach out to me.

Speaker 1:

Thanks for tuning in. Be confident in your retirement. Have a wonderful day. Thanks for joining me on another episode of what the Wealth. If you enjoyed the episode today, smash that subscribe button. It helps me more than you think. Also, if you found this episode insightful and a light bulb went off, share it. Your friend, aunt Judy, the random guy in the office who's always talking about investments. Wealth isn't about just the cha-ching. It's about our choices, chances and changing our financial futures. The information in this podcast is informational in general in nature and does not take into consideration the listener's personal circumstances. Thank you. Securities offered through LPL Financial member. Finra SIPC. Paradigm Wealth Partners is the other business name for Independent Advisor Alliance. Investment advice offered through Independent Advisor Alliance, a registered investment advisor. Independent Advisor Alliance and Paradigm Wealth Partners are separate entities from LPL Financial.