By “buckets,” we are referring to taxable, tax-deferred and tax-free buckets. The reason we feel it is critical to save money in all three is to maximize your ability to control the amount of taxes you pay in retirement.
For example, let’s say you arrive at retirement with a large, pre-tax bucket of money (and that’s all). While you’ve likely accomplished your goal of minimizing your income taxes all along the way, you will likely have no control over your tax burden moving forward (as you draw from your one-and-only pre-tax bucket of money). You draw out $10,000 pre-tax, just to get $7,000 after-tax.
However, if you build taxable and tax-free (Roth) buckets over time as well, we can better control your tax bill moving forward as we draw your retirement cash flow from all three types of accounts to minimize your overall tax bill.
While we understand that this strategy sounds easy, you may be thinking: Don’t I make too much money to contribute directly to a Roth? However, there are techniques we can consider that will allow you to get dollars into Roth accounts. Those methods are for a future blog.