If you think that a bucket strategy is right for you, then an IRA is the way to go. Image: graja/Shutterstock.com
By: John Grobe, Federal Career ExpertsAlmost 40 % of financial advisors suggest that individuals use a “bucket strategy” in withdrawing from retirement savings. A bucket strategy, sometimes referred to as a time-based segmentation approach, has you allocating your money in two, or more, different accounts/funds, or “buckets”.
The first bucket would be invested in safe (presumably lower yielding) investments from which you will make monthly withdrawals for income during retirement. Ideally this bucket should have enough in it to last several years.
A second bucket would be invested in riskier (presumably higher yielding) investments which will not be needed for some time. You would periodically replenish bucket one from bucket two.
You also could have more than two buckets. For example, you could set up a bucket for “now”, another one for “soon” and a third for “later.”
A bucket strategy would keep you from having to withdraw funds from more volatile investments during a market downturn and would allow time for those funds to recover their value over time.
BUT you cannot utilize a “bucket strategy” in withdrawing from the TSP, even though most IRA custodians allow you to do so. The TSP requires that withdrawals be taken proportionately between your TSP investments based on your account allocation. Let’s say that I am withdrawing $1,000 each month and that my account is evenly allocated between the five basic funds. $200 of each withdrawal would come from the G Fund, $200 from the F Fund, $200 from the C Fund, $200 from the S Fund and $200 from the I Fund. I cannot utilize a bucket strategy if I leave my money in the TSP.
Even though you cannot designate the fund from which TSP withdrawals come, you are able to select which part of your account (i.e., traditional or Roth) from which you want your money taken.
If you think that a bucket strategy is right for you, then an IRA is the way to go. In fact, one of the advantages that IRAs have over the TSP is flexibility. The TSP, however, has other advantages. The following table has the pros and cons of these two important retirement savings vehicles.
TSP
Lower expenses and no annual fees.
Penalty free withdrawals are allowed as early as age 55 (age 50 or 25 years of qualifying service for certain special category employees) in many circumstances.
IRA
Wider choice in investment vehicles.
More flexible withdrawal options.
Penalty exceptions for higher education and first-time home buyer.
Ability to make qualified charitable distributions beginning at 70 ½.
John Grobe, President of Federal Career Experts, is an expert in the area of federal employee retirement and benefits. This expertise comes from his 26 year federal career in which he managed the retirement program in a 3,500-employee office of a large federal agency.
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