實習期間，老闆推薦我一本書 “The Bucket Plan”。是由一位叫Jason Smith的Financial Advisor根據他顧客的案例所寫的。書裡敘述到他幫一對老夫妻做財務規劃，並且用了Bucket Plan的思維來制訂策略。一年之後，老先生因意外過世了，而老太太因為有先做好理財規劃，才能在財務上隨時做好準備，不會因為先生的離世失去大筆的經濟支柱，從而生活產生困難。
我自己非常推薦朋友們閱讀這本書，非常的淺顯易讀，但所傳遞的概念將會改變我們思考人生財務的邏輯和想法。Bucket Plan裡包含非常重要的理財觀念。
而我的第二篇Case Study，也套用了Bucket Plan的邏輯，把案主的財務分成，臨時應急的資金、短期穩定的投資、長期高回報的投資。
All the following information is not real due to the confidential issue. The case study is only displayed to help readers have better understanding of the concept of personal financial plan.
The Three buckets concept.
The three buckets concept is a strategy that covers vertical and horizontal perspectives. Financial advisors could apply the concept to help clients build a solid and progressive financial plan. By dividing assets into three buckets, clients could enjoy continuing cash inflow while ensuring the asset grow progressively. In the following example, we will illustrate how we implement the strategy in a real case and how the strategy will fulfill a sustainable financial goal.
(Client’s name has been changed for confidentiality)
Cassandra Mark’s Case
Overview
Cassandra Mark is one of our clients. She is 50 and doesn’t have children and is not married. She hasn’t worked for a few years and currently engages in charitable activities most of the time.
Cassandra’s parents passed away two years ago and left her a $14 million inheritance. $7.5 million of the inheritance was given directly to Cassandra and $6.5 million was retained in an irrevocable trust. Cassandra then set up a revocable trust and funded it with liquid assets that she just inherited. Also, the irrevocable trust from her parents would have monthly distribution $25,000, which will be further pumped into her personal revocable trust. Every month, Cassandra withdraws $15,000 from her trust. She also has $50,000 personal funds outside of the trust.
($300,000 and $180,000 are annual cash flow)
Analysis of current financial situation
From a financial perspective, Cassandra is in a good position. She doesn’t have kids to raise and she controls her spending well. Nonetheless, there are few things that she still needs to be aware of to prevent her from running out of money.
First of all, inflation rate will be a crucial factor to determine how fast Cassandra drains her fund. Her current monthly consumption is $15,000. Given that Cassandra is 55, presumably, there are still 30 to 40 years ahead of her. By the later stage of her life, it is likely that she will spend more than $15,000 per month to maintain the same level of lifestyle.
Secondly, even though Cassandra controls her spending prudently, she still makes some significant purchases from time to time. In addition, she might also experience some unexpected issues such as medical needs, which could cost her a tremendous amount of money. Unpredictable incidents can come without warning and spoil her financial plan.
Finally, if Cassandra decides to invest her money but doesn’t diversify well. She could experience a dramatic shrinkage of her asset if the market undergoes a terrible recession.
Implantation of three buckets strategy
In order to help Cassandra keep being in a sustainable financial situation, we implemented three buckets strategy into her plan.
We will treated her personal fund $50,000 as a first bucket for emergency purposes, leaving it untouched and liquid for unplanned expenses/emergencies. We then divided her $7.5 million personal trust into two parts: $3.5 million into long-term funds and $4 million into short-term funds respectively. We didn’t take any action on the family trust as it is irrevocable.
Reason behind the strategy
The main purpose of short-term funds is to serve as a pool of monthly regular withdrawal. We invested conservatively to ensure that the pool will be maintained at the same level steadily while we take money out from it at the same time. We aim to gain 4% of annual return from the investment so it can just cover $180,000 annual regular withdrawal ($15,000 monthly). The conservative portfolio will be mainly constituted with fixed income like bonds and smaller portions of mutual funds. $4,500,000 earning 4% will generate $180,000 per year without needing to tap into the principal.
On the other hand, the other $3,000,000 will be invested in more growth oriented assets that are focused on long-term growth. This engine will be purposed to expand assets more aggressively. A significant growth is foreseeable after the fund is invested in a more aggressive portfolio and floats up and down with the market for ten to twenty years. Furthermore, the $25,000 per month distribution from family irrevocable trust will be pumped into this longer-term bucket every month to accelerate the growth of the investment. The portfolio is composed of more equities and less fixed income as we want it to be more aggressive.
Assessment of current market condition
Currently, the market is not stable as it is suffering from the pandemic of coronavirus. If there is a significant spending need in the near future, people might want to allocate more money into the stable investment bucket. Taking Cassandra’s case for example, if she is planning to buy a car in the near future (within the next 12 months), my suggestion would be to divert the monthly $25,000 distribution from the irrevocable trust from the long-term aggressive funds to short-term stable one for a few months to ensure the needed money won’t evaporate during the market downturn.
Conclusion
Three bucket concept is a comprehensive strategy. It allocates funds into three buckets with different portfolios and takes timeline into account. Investors are able to spread risk and ensure the liquidity of their assets by adopting the strategy. In Cassandra’s financial plan case, we would expect that her short-term funds can provide her consistent cash inflow in recent ten years without shrinkage. After ten to twenty years, we expect her growing long-term funds will expand sufficiently enough for her to enjoy a comfortable and high standard of living for the rest of her life.
