5 Buckets, 4 Shovels, a Beach and a Map A Guide to Financial Security
Stephen D. Mayer
~ Table of Contents ~ Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Format of the Book . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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Part One: Something for Everyone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7
Chapter One: Introducing the Buckets, Shovels, Beach and Map . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Chapter Two: The Beach and the Map . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Chapter Three: The Five Buckets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Liquid Assets Bucket . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Insurance Bucket . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Retirement Assets Bucket . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Personal Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Investment Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Chapter Four: The Shovels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Part Two: The Story of Steve and Patty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Part Three: Building Your Own Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Copyright © 2018 by Stephen D. Mayer All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the publisher, except in the case of brief quotations embodied in critical reviews and certain other noncommercial uses permitted by copyright law. For permission requests, write to the publisher, addressed “Attention: Permissions Coordinator,” at the address below. SD Mayer & Associates LLP 235 Montgomery Street, 30th Floor San Francisco, CA 94104 (415) 691-4040 www.sdmayer.com Ordering Information: Quantity sales. Special discounts are available on quantity purchases by corporations, associations, and others. For details, contact the publisher at the address above. Orders by U.S. trade bookstores and wholesalers. Please contact the publisher at the address above. Printed in the United States of America DISCLAIMER: All calculations and data presented within SD Mayer & Associates LLP publications and digital marketing and media including but not limited to websites, brochures, presentations and return models are deemed to be accurate, but accuracy is not guaranteed. The projected pro forma returns on investment are intended for the purpose of illustrative projections to facilitate analysis and are not guaranteed by SD Mayer & Associates LLP or its affiliates and subsidiaries. Past performance is not an indicator of future results. The information provided herein is not intended to replace or serve as a substitute for any legal, real estate, tax, or other professional advice, consultation or service. INVESTMENT RISKS: All investments, including real estate, is speculative in nature and involves substantial risk of loss. We encourage our investors to invest carefully. We also encourage investors to get personal advice from your professional investment advisor and to make independent investigations before acting on information that we publish. Much of our information is derived directly from information published by companies or submitted to governmental agencies on which we believe are reliable, but are without our independent verification. Therefore, we cannot assure you that the information is accurate or complete. We do not in any way warrant or guarantee the success of any action you take in reliance on our statements or recommendations. Past performance is not necessarily indicative of future results. All investments carry risk and all investment decisions of an individual remain the responsibility of that individual. There is no guarantee that systems, indicators, or signals will result in profits or that they will not result in losses. All investors are advised to fully understand all risks associated with any kind of investing they choose to do. Hypothetical or simulated performance is not indicative of future results. Unless specifically noted otherwise, all return examples provided in our websites and publications are based on hypothetical or simulated investing. We make no representations or warranties that any investor will, or is likely to, achieve profits similar to those shown, because hypothetical or simulated performance is not necessarily indicative of future results. Don’t enter any investment without fully understanding the worst-case scenarios of that investment.
~ Introduction ~ I have been a practicing CPA since 1976 and started my career as an auditor for Coopers & Lybrand (now Pricewater-
houseCoopers) in San Francisco. After ten years of working for Coopers, I left and cofounded my first firm, Burr Pilger & Mayer (BPM), which we started with a small group of five people. By the time I left, 25 years later, BPM had
grown into a large regional firm with over 400 people and multiple offices around the globe. In early 2013, I started a new firm, SD Mayer & Associates, focused not just on accounting, but on an individual’s complete financial se-
curity. Within five years, SD Mayer had grown from a core group of seven people to nearly 40 individuals focused on providing accounting, business advisory, outsourcing, wealth management and retirement plans services.
I have always considered myself to be more than just a CPA. It was extremely important to me, as a professional,
to become a “trusted advisor” for my clients. I pushed myself to be more than an auditor, and over the years I added tax, consulting, technology, wealth management, bankruptcy and turnaround work, along with mergers and acqui-
sitions, to my skill set. This experience gave me many of the tools needed to best serve clients, but I’ve always felt that something was missing.
As I watched my clients grow older, I noticed that they were more and more focused on their financial security and often wondered if they had enough money to retire and enjoy life. They were also confused about where to start, the right type of insurance to purchase, how to invest their money wisely, how to create the right estate plan, as
well as other related issues. If they were wealthy, and had substantial liquid assets, they often had many professionals available to help them manage their money and handle their financial needs. However, for those without a lot of wealth, they often struggled to assemble the right team of experts to help them figure out their financial future and plan for their retirement.
Five Buckets, Four Shovels, a Beach and a Map | 1
Over a two-year period, I asked about 1000 people, over the age of 30, the following question, “At least every 48
hours, do you wonder if you will have enough money for retirement and/or are your financial affairs organized correctly?” It turned out that over 80% of the people had wondered about this every couple of days. Even more eye opening, though, was that if the person was over the age of 40, the number grew to over 90%.
As an accountant and advisor, I found this striking and thought if I could develop a simple solution to help people manage their finances in a comprehensive manner it could make a meaningful impact on their lives.
I also thought most professionals who were helping their clients with overall wealth management were one di-
mensional. The accounting firms focused on tax returns and year-end tax planning. The estate-planning attorneys
focused their energy on the estate plan. For insurance professionals, their focus was solely on insurance, while the investment advisors focused mostly on asset allocation. I felt that no one was taking a holistic approach and di-
recting their efforts on helping the client achieve financial security. For me, financial security was a combination of
tax and tax planning, investment advice, insurance, estate planning, retirement planning, and budgeting cash flow on an annual basis. Not taking a complete approach in helping their clients was neglectful by these professionals. However, the profession was only half the problem. The other half of the problem—the people who knew they
should do something but could not get started. Most individuals had a hard time deciding to move forward with almost anything other than getting their tax returns done because the process seemed so complicated.
As I was preparing to launch SD Mayer & Associates, I vowed to “change the status quo” and create something
unique, easy to understand, and simple to use to help people set goals to reach their financial security using all of the tools and knowledge I had gained over my career.
2 | Five Buckets, Four Shovels, a Beach and a Map
Early in my career, I had developed the framework for a financial strategy called “The Five Buckets” and used it in my personal life, in addition to utilizing it with a couple of clients.
While on a backpacking trip, where I do some of my best thinking, I put together an outline for this book. I expanded the concept of “Five Buckets” to include advisors that I called “Four Shovels” and a metaphor for one’s life, which I called “The Beach”, and a road map I called “The Map”. Finally, I threw in “Sand” to represent money.
I spent the next two years working with clients to test and improve the concepts. While at lunch with a long-term friend, John Legnitto, I explained the entire concept of “Five Buckets” and he encouraged me to write a book.*
From that day on, I was committed to putting the concept into a book that was easy to read and understand, but had powerful concepts that could change someone’s life and get them motivated enough to focus on their fi-
nancial security. I wanted the book to be visual, with illustrations and charts that would not intimidate those who
are unfamiliar or uncomfortable with financial planning. I also wanted the book to be a tool that parents and even grandparents could use to help the next generation start their financial plan at an early age.
With help from my family, friends and Rich Sigberman, an artist, “Five Buckets, Four Shovels, a Beach and a Map: A Guide to Financial Security” was created.
As I was developing the concepts for the book, I reached out to my friends and colleagues in the financial planning world to ask for their help and guidance. The people I chose to help were picked because of their practical experience and their ability to explain difficult concepts in easy to understand language. I also asked my children, who *Unfortunately, John recently passed away from pancreatic cancer, but I am grateful for his encouragement. I shared an early draft of this book with his family and they told me that, “John would have been proud.”
Five Buckets, Four Shovels, a Beach and a Map | 3
are 21 and 24, to help edit and make sure the concepts were easy for a 20- to 25-year-old to understand. I asked for help from people that I have known for more than 20 years, mainly because we have all shared life
experiences together. I also chose professionals whose target market is middle class Americans, mainly because it is that market that has the most difficult time finding help, since most professionals are looking for larger, wealthier clients who can pay larger fees. I also wanted to reach out to clients that I have helped over the years to see if the practical advice that I gave them paid off. I hired an artist, Rich Sigberman, to do the illustrations and make them fun and easy to understand. Though I like to write, my grammar and sentence structure is not the best, so I have worked with a team of editors to advise and proofread as necessary. Finally, I wanted those professionals who, over the years, have helped my family and I achieve our goals.
Therefore, I would like to thank two of my own shovels, Bill Weseloh and Rick Hillsbery; my family, Dylan, Kenzie, Nicola and Patty Mayer; and many others, including Therese Hjelm, Adam Herrera, Kathy Wright, Jeff Stephens, Lloyd Wiborg, Michael Mayer, Michael Tucker, Rich Sigberman, along with too many others to mention. If any of
you are reading this book, please know that you were instrumental in helping me solidify the content of this book.
e Speaking of financial security, 100% of the profits from this book will be contributed to “The 5 Buckets, 4 Shovels
Foundation� which will distribute the book to high schools and colleges to invest in the financial knowledge of the
younger generation. The Foundation will also be contributing to benefit medical research and youth activities. As I
have been lucky in creating my financial security, I want to pass on my knowledge and expertise and make sure the financial profit is used to help others achieve their own financial security.
4 | Five Buckets, Four Shovels, a Beach and a Map
~ Format of the Book ~ The book is divided into three Parts that are woven together.
Part One explains the concepts behind the Five Buckets, the Four Shovels, a Beach and a Map. This includes many of the illustrations, charts and graphs meant to take a complex subject and simplify it.
Part Two is a quasi-real-life story of my family using the concepts in this book over our lifetime to build a financial
plan. I’ve taken editorial license with a few minor details, like my job as an engineer instead of a CPA, or the fact that my wife doesn’t really own a design firm, and that we actually got married when I was 38, but most of the
story is pretty much true and all of the financial planning ideas and tools that are discussed have been used in my own life. The changes to my life story were made in order to allow me to present examples of real life experiences many of our clients have experienced.
Part Three is a call to action with a practical approach to use the concepts and build your own plan depending on how old you are and the types of assets you already have accumulated.
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6 | Five Buckets, Four Shovels, a Beach and a Map
~ Part One: Something For Everyone ~ Five Buckets, Four Shovels, a Beach and a Map is a simplified approach to financial planning that uses drawings, charts, and
a quasi-true story to help give anyone the start that they need to better plan for their financial future. The Buckets, the Shovels, the Beach and the Map are all metaphors for the various aspects of financial planning that anyone can understand. The drawings and charts are easy to understand and follow.
Financial security, as described in this book, is a combination of tax, retirement, cash flow, estate, investment and insurance planning. These concepts are linked together with the goal of protecting one’s assets throughout one’s life, while planning for a rewarding retirement once one stops working.
For most people, the idea of trying to link taxes, retirement, cash flow, insurance, estate and investments planning can be frightening and confusing. It seems like a long, complicated process and as a result most people have a difficult time getting started.
This approach—Five Buckets, Four Shovels, a Beach and a Map—makes financial security a visual process and
creates a systematic approach to use throughout one’s life meant to protect from sudden misfortunes and save for a rewarding retirement.
Just like there are different types of beaches—those with white sand, brown sand, rocky features, and steep with cliffs to name a few of them—there are different types of people—young, old, working, retired, married with kids, married without kids, unmarried, domestic partners, etc. The concepts in this book apply to any “family unit”, regardless of circumstances or specifics.
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By using the map and help from the shovels, you will learn how to fill and transfer sand from the various buckets
during your life while protecting you and your family from sudden and unexpected events. This will enable you to live your life with the knowledge that you have created a plan that will ensure your financial security.
The Five Buckets, Four Shovels, a Beach and a Map is a concept that I have used throughout my career, both personally and for my clients.
A
It is easy to understand;
easy to follow and like the tides that come in and
out each day, it will give
B
you some predictability in a very unpredictable
E C
world.
The diagram to the right gives an overview of
everything covered in this book. To help get you
started, let’s outline the
main concepts shown in the diagram:
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D
1. The timeline at the top A shows a life span from birth to age 70+ years. It also shows that, for most people, the timeline contains periods for education, career, having a family, saving, buying, borrowing and retirement. Of course we understand that everyone’s timelines are different and each plan is custom to the individual.
2. The concept of financial security
B
is introduced as a combination of tax planning, retirement planning, es-
tate planning, investments, insurance, cash flow budgeting and other concepts. It is critical that people understand that having a solid plan for these components is vital to reaching financial security.
3. The five buckets
D
are introduced as the main categories of assets that one will acquire during their lifetime.
The buckets are: Liquid Assets Bucket, Insurance Assets Bucket, Retirement Assets Bucket, Personal Assets
Bucket, and Investment Assets Bucket. Not all people will use all five of the buckets, but having them explained will help you properly focus on filling them. 4. The shovels
C
include the Public Accountant Shovel, an Insurance Shovel, an Attorney Shovel, and an In-
vestment Shovel. Obviously, throughout one’s life, other advisors such as real estate professionals and bankers will be used, as well as for the purposes of this book, but the four shovels are the key advisors.
5. As you look at the diagram you can see that the liquid asset buckets (in the second row) are filled from one’s paycheck. Most of this money is spent on regular family living expenses. At the point of retirement
E , the
paycheck stops and the other buckets need to have accumulated assets that can be “dumped” into the liquid asset bucket to cover these ongoing expenses.
Five Buckets, Four Shovels, A Beach and A Map | 9
The diagram gives a very basic overview of each bucket through the timeline of one’s life. The buckets will be explained in much more detail throughout the book. A few general thoughts before we start: 1) I am often asked when is the best time to begin the process of achieving financial security. Obviously, the earlier you start the more time you have to accumulate assets but if you haven’t started yet then the correct answer is today.
2) Another question that comes up frequently is how much money do I need to retire. My answer is a question
back to them, “How long is a piece of string?” Obviously unless you go through the process of evaluating where you are and where you want to go, you won’t know.
3) Perhaps the most difficult question is where do I find competent advisors. I think this is the hardest thing to
achieve. Most of us have had 50-100 teachers by the time we finish school, but few would say more than 3 or 4
were truly outstanding. Finding the right advisors is tough and we will spend some time discussing how to do that later in the book.
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~ Chapter One: Introducing the Buckets, Shovels, Beach and Map ~ This chapter presents an overview of the Buckets, Shovels, Beach and Map.
The Buckets As you can see each of the buckets is a different shape and size. This makes sense, as the asset groups that each bucket represents are all very different. The buckets represent the financial assets that you will accumulate dur-
ing your life. With a little imagination and some organization, you will see that every asset can be placed into one
of the five buckets. Some of these assets will be associated with corresponding debt or mortgages, and some are owned debt-free.
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A brief summary of the five buckets are as follows:
Liquid Assets Bucket
These are the assets that you can save and spend frequently with little or no tax effect. This is also where you would put your paycheck and pay your living expenses. For all practical
purposes this bucket contains your checking, savings account and liquid investments that are not tax deferred such as retirement accounts.
Insurance Assets Bucket
include term life .insurance, whole life insurance, and disability insurance, as well as property,
These are the insurance assets and products that you will need during your lifetime. These casualty, and general liability insurance.
Personal Assets Bucket
your jewelry and other such items. Usually, these assets are associated with a corresponding
These are the physical assets that you own such as your house, a second home, your car, debt or mortgage.
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Retirement Assets Bucket
retirement. These include IRAs, pension plans, 401(k) accounts and social security.
These are the assets that are accumulating on a tax deferred basis that you can use in your
Investment Assets Bucket
inheritance that you are counting on receiving. The hope is that these assets will appreciate
These are long-term assets such as rental real estate, your company or possibly an over time and will generate a large amount of cash via a liquidity event.
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The Shovels The shovels represent the professionals who have the training and experience to guide you through the ongoing
process to most efficiently fill and empty the buckets at the right time. They also help you organize your financial affairs in order to protect you and your family in times of crisis or upheaval. The shovels are:
14 | Five Buckets, Four Shovels, a Beach and a Map
Your CPA Shovel
The advisor who will focus on tax and cash flow planning, and can most likely help you put together a
comprehensive financial plan. Many times the CPA is a good choice for advising on the overall plan and managing other advisors.
Your Attorney Shovel
The advisor who will focus on estate planning and help you with legal matters if and when they arise.
Your Investment Shovel
The advisor who will focus on investing your liquid and retirement assets to produce a reasonable rate of return while mitigating risk and undue exposure.
Your Insurance Shovel
The advisor who will focus on protecting you, your family and your assets from a sudden event while at the same time helping you build long term assets.
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The Beach The beach represents your life, all of the people that you will meet, the gradual evolution that takes place in life,
and also the sudden and dramatic changes (such as a huge storm) that we all face in life. The picture below be-
gins with a couple living their lives contently, and then a storm hits and washes the beach away. In real life, these storms include things such as divorce, financial crisis, the death of a family member, losing a job, losing a home,
illness or hospitalization. But, like in life, on the other side of these storms, things eventually get back to some level of normality, as is the case of the beach below. This makes the planning process more complicated but certainly much more interesting, and a good financial plan will try to account for the storms and the renewal that occurs afterwards. Looks like the couple below had children, which they’ve accounted for in their financial plan.
The sand on the beach represents your money. Over the course of your life, the shovels (your advisors) will help you fill the various buckets with sand (money) and eventually work with you to move sand from one bucket to another when appropriate to do so.
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The Map The Map represents the plan to help guide you to achieve financial security. The plan will constantly change as you meander through life. Despite this, but like any good map, it will eventually help to get you to the right place at the right time.
Looking at the Map you can see that there are several major categories, which we go over in the next chapter.
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18 | Five Buckets, Four Shovels, a Beach and a Map
~ Chapter Two: The Beach and the Map ~ The beach is a metaphor for your life representing the people you will meet, your life experiences and your financial undertakings. As time progresses, your life changes, your family grows, your relationships change and there are usually more people to include in your plan.
The sand on the beach represents your money. Over the course of your life, with the help of the shovels (your advisors) you fill the various buckets with sand and eventually the shovels will help you move sand from one bucket to another when it is appropriate to do so.
As we explained earlier, on a regular basis, the beach is very consistent but gradually changes over a long period of time. Often there are minor storms that come in and upset the beach a little, but Mother Nature quickly adapts
and within a short period of time the beach returns to normal. Every once in a while, there is a major storm and the beach is changed forever. The map will help protect you from the minor storms and provide you with a plan of action in the event of a major storm.
We have all thought about finding that special treasure map that would lead us to a “pot of gold” that would solve
all of our financial concerns. Other than winning a large lottery or hitting a major home run with an investment, the
“pot of gold” is seldom found. However, I believe that with the right map and the right shovels filling your buckets, achieving financial security is possible for anyone. Even if you do win the lottery, you will still need shovels and buckets to manage your winnings.
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The map has seven parts to it:
“Who’s who”
plan, or for whom you will have some responsibility towards, that will be included in the plan.
This represents all of the people that you will encounter in your life that will either help you with the
“How Much do I Have”
This represents the various assets in your buckets. These assets will change as time goes by and circumstances change, but it is always important to have a good idea of where you are
with regards to your financial picture on an annual basis. This is a fair market balance sheet
update on an annual basis that recaps your financial position consisting of assets and liabilities including contingent liabilities. This should not only show today’s values, but also projected values in the future.
“Look Out—Sink Hole”
constantly looking out for signs of danger and adequately protecting yourself with insurance and
good
This represents the multitude of dangers that one encounters during their lifetime. Unless you are advisors, things can get out of control quickly. With proper planning you will be prepared to handle most situations.
20 | Five Buckets, Four Shovels, a Beach and a Map
“What’s the Flow”
This represents the fact that your plan is a living, breathing document and needs to
every five years or more. For example, the detailed cash flow analysis will be
be updated on an ongoing basis. Some parts are updated annually and other parts updated on an annual basis, and shows your financial sources and uses of cash, growth of assets, and the long-term effects of these changes on your financial
position. The key concept is to clearly understand where you are and where you are
going.
“Family Documents”
This represents that your plan has many documents associated with it. Having this all organized in one place makes it easy to change and provide guidance to your family in the event of a major storm. This “file cabinet” contains all of your important documents, including estate
documents (wills and trusts), insurance policies, debts of trusts, special instructions, escrow papers, tax returns and the like.
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“In Case of Emergency, Break Glass”
This represents that you have to have a contingency plan made up of insurance or
in financial circumstances. A good rule of thumb is to have liquid savings equal to
some savings to help you through a crisis in the event of a loss or a sudden change 6 months of your paycheck and life insurance to protect your family. This is your
contingency plan, written in plain English that is the road map in case of an emergency, sudden life change, death or disability. It should be reviewed and updated every few
years.
“Pot of Well-Planned Gold”
This represents reaping the rewards of a lifetime of hard work and proper planning that enables you to have a well-funded retirement that you can enjoy.
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~ Chapter Three: The Five Buckets ~ What:
Liquid Assets Bucket
The first bucket is “liquid assets”, which includes your savings accounts, your marketable
securities (stocks and bonds) and this is where you would deposit your monthly paycheck. For the most part it is assumed that the tax basis of these assets is close to fair market value, and if you
wanted to spend some or take “sand” out of this bucket there would not be a large tax cost. It is also
the bucket where your annual earnings from wages, interest and dividends, family gifts and the like are added and your annual expenditures for all aspects of your family’s expense are spent.
Timeline/Time Span:
This bucket starts out empty and by developing a long-term savings and investing plan it grows to be a major
portion of your net worth. This is also the bucket where most people empty other buckets into, thus filling it up quicker.
How Bucket is Used:
Cash Flows: The best way to think about this bucket is to consider the various types of funds that will be used to
fill it up over time as well as the various types of expenses that will be incurred, emptying the bucket over time. The chart below shows one’s life over a long period of time broken down into five age groups. Obviously everyone will
Five Buckets, Four Shovels, a Beach and a Map | 23
have a different life experience, but for most people the types of funds going into the bucket and the funds going out are somewhat realistic in the time frames shown. Age 20-30
Sources of Income
Your earnings Interest & dividends
Age 31-40
You and your spouse’s earnings Interest & dividends
Age 41-50
Age 51-65
Age 65+
You and your spouse’s earnings Interest & dividends Rental income Gifts from parents
You and your spouse’s earnings Interest & dividends Rental income Inheritance Sales of business
You and your spouse’s earnings Interest & dividends Social security Pension plan Retirement plan distributions Downsizing home
Mortgage payments
Sources of Expenses
Rental expenses Food & living expenses Taxes Insurance premiums Leisure & entertainment Retirement Savings
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Mortgage payments Food & living expenses Taxes Insurance premiums Leisure & entertainment Retirement savings Medical related expenses
Food & living expenses Taxes Insurance premiums Leisure & entertainment Retirement savings Medical related expenses Child rearing Large purchases or repairs
Mortgage payments Food & living expenses Taxes Insurance premiums Leisure & entertainment Retirement savings Medical related expenses Child rearing Large purchases or repairs Charitable giving
Food & living expenses Taxes Insurance premiums Leisure & entertainment Retirement savings Medical related expenses Gifting to family & friends
The chart shown on the next page might represent a typical family’s budget for the year by quarter. The reason
this is shown is that most people do a poor job of budgeting where their money comes from and where it is spent. While this chart is not intended to work for everyone, it has some very basic principles that should be part of everyone’s plan.
First, it shows that not all income and expenses remain the same every quarter. The totals at the bottom show that in some quarters you have a surplus, and that in other months you have a deficit due to increased spending. You
must be disciplined enough to save when there is an excess of cash inflow, so you have reserves when there is a deficit.
Second, it shows that the first money taken out is used to pay for taxes, insurance, education savings, and retirement savings. These types of expenditures should be automatic so you don’t have to think about them. Small amounts paid on a consistent basis will reap great rewards down the road.
Five Buckets, Four Shovels, a Beach and a Map | 25
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Total
$27,000 $18,000
$27,000 $18,000
$27,000 $18,000 $15,000
$ 900 $45,900
$ 8,000 $ 900 $53,900
$27,000 $18,000 $20,000 $10,000
$ 900 $60,900
$ 900 $75,900
$108,000 $ 72,000 $ 35,000 $ 10,000 $ 8,000 $ 3,600 $236,600
Savings Related 401K (Both Spouses) College Savings Other Savings
$2,700 $1,500 $1,500
$2,700 $1,500 $1,500
$3,600 $1,500 $1,500
$4,500 $1,500 $1,500
$13,500 $ 6,000 $ 6,000
Tax Related Witholdings
$8,100
$8,100
$11,100
$14,100
$41,400
$4,750
$1,200 $1,500 $ 750
$ 500 $2,400 $3,000 $7,000
$2,000 $2,250 $ 900
$2,250 $ 900
$2,000 $2,250 $ 900
$1,050 $ 500 $1,399
$1,050
$ 999
$1,050 $ 500 $ 999
$ 999
$4,200 $1,000 $4,400
Personal Related Travel/Vacations Entertainment/Leisure Groceries Household Purchases Gifts Medical/Dental
$ 750 $ 750 $1,200 $ 600 $ 300 $ 375
$ 750 $ 750 $1,200 $ 600 $ 300 $ 375
$ 750 $ 750 $1,200 $ 600 $ 300 $ 375
$ 750 $ 750 $1,200 $ 600 $ 300 $ 375
$4,250 $3,000 $4,800 $2,400 $2,500 $1,500
Children Related School Expenses
$32,000
Inflows Salary - Spouse 1 Salary - Spouse 2 Bonus - Spouse 1 Bonus - Spouse 2 Tax Refunds Interest/Dividends Total Inflows Outflows
Insurance Related Medical Insurance House Insurance Auto Insurance Life Insurance House Related Mortgage Payment Property Taxes Utilities Household Help Minor Repairs Auto Related Car Payment Repairs Other
Other
$ 500 $1,500 $ 750
$2,200 $2,250 $ 900 $2,500
$1,050
$1,200 $ 750
$2,200 $4,000 $9,300 $3,600 $2,500
$64,000
$32,000
Charity Total Cash Outflows
$ 1,500 $ 63,924
$ 1,500 $ 30,174
$ 1,500 $ 6,024
$ 1,500 $ 39,324
$ 6,000 $199,450
Quarterly Net Income Beginning Savings Ending Savings
($18,044) ($48,725) ($66,750)
$ 23,726 ($32,800) ($ 9,075)
($ 5,124) ($ 23,175) ($ 18,050)
$ 36,576 $ 15,400 $ 57,942
$ 37,150 $ 0 $ 37,150
26 | Five Buckets, Four Shovels, a Beach and a Map
Typical Family’s Annual Budget (divided by quarter).
Cash Flows: Now that we have addressed the types of cash flow over the course of your lifetime and introduced
the concept of an annual budget, the chart on page 24 is an example of the Liquid Asset Bucket being used over a long period of time.
The inflows to the Liquid Asset Bucket are:
1. Annual earnings while you are working 2. Investment earnings
3. Retirement distributions including whole life insurance 4. Major inflows from asset sales or inheritance. The outflows from the Liquid Asset Bucket are: 1. Income taxes
2. Household expenses (including education and mortgages) 3. Retirement and Insurance spending 4. Major expenditures
The ending balance in the Liquid Asset Bucket, other than a reserve for savings, is your liquid portfolio that can be managed by your investment advisor.
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28 | Five Buckets, Four Shovels, a Beach and a Map
Insurance Bucket What:
The second bucket is insurance. During a person’s life, depending on their family situation, they could use a variety of different insurance products. In many cases, insurance is used as
protection for a sudden unexpected event that happens to many of us. However, in some cases they are also a retirement asset or an estate-planning tool.
Types of Insurance Coverage:
There are a variety of insurance options available to you that provide coverage for your most important assets.
This will include property insurance, auto (or other vehicle) insurance, health insurance, life insurance, and depending on your net worth and the assets that you own, umbrella and indemnity insurance.
It is interesting when you realize that in most situations, the amount and type of coverage for medical and indem-
nity insurance doesn’t change all that much. To protect your family, medical insurance is essential. To protect your assets, insurance from an auto accident, a fire, a storm, or an earthquake is essential. The amounts of coverage, the amounts of deductibles, and your policy exclusions are all personal preferences that seem to vary with your level of net worth. The higher your net worth, the higher your coverage limits.
While we cannot cover all of the insurance products that are available to you, we will cover the most common.
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Auto Insurance: Auto and vehicle policies cover the costs associated with getting into a car accident, and often includes liability coverage should it be determined that you were at fault in an accident and that you must cover the costs caused by you to the other vehicle.
Most states require all vehicle owners to purchase some minimum amount of auto insurance, but many people
choose to purchase additional insurance to provide further coverage. Premiums will vary based on age, gender, years of driving experience, accident and moving violation history, along with a variety of other factors.
Health Insurance: Health insurance covers medical and surgical expenses that you may incur, though coverage varies. As with auto and property insurance, health insurance policies will either reimburse you for the expenses that you incurred while sick or injured, or will pay the health care provider directly.
Many people receive health insurance coverage from work, and it is often part of the employee benefits package used to attract potential employees instead of losing them to a competitor.
It is important that you understand the limits of your health insurance policy. Medical bills are often high, and your
policy may only cover part of the bill. Unforeseen medical costs can deplete your savings without proper coverage, especially if you are unable to work while you are sick or injured.
Property Insurance: Property insurance includes homeowners insurance and renters insurance, and provides
you with financial reimbursement in the event of damage or theft of your property and its contents. Depending on
where you live, you may need to consider flood or earthquake insurance as well. Not all standard home insurance policies cover damages due to events like these.
30 | Five Buckets, Four Shovels, a Beach and a Map
Property insurance will generally cover damage caused by fire, smoke, wind, hail, lightning, and weight of ice and snow, in addition to theft. Your policy may also provide liability coverage in the event that someone other than yourself is injured on your property and decides to sue.
In the event that you have to file a claim, your policy will either reimburse you for the actual value of the damage or for the replacement cost to remedy the damage. It is critical to understand what your insurance policy does and does not cover.
Why is it Important to have Property Insurance:
As you will see, your house may be one of your main assets and can contribute greatly to your net worth. It may
be one of the largest purchases that you will make in your lifetime. Your home may also hold a number of personal assets, like jewelry, artwork or antiques, which would constitute a large financial loss if damaged, destroyed, or stolen.
It is critical to protect your home with adequate insurance coverage to avoid bearing the full brunt of the cost to repair or replace your home and its contents.
Umbrella Insurance: Umbrella insurance is a type of extra liability coverage that extends beyond the limits of your home or auto insurance. This type of policy is best for people who have a large number of assets or may be at a high risk for being sued.
Disability Insurance: Disability insurance provides a benefit that will replace part of your income if you can’t work due to illness or injury. You can purchase disability insurance as an individual from an insurance company directly or your company may offer disability insurance through an employer-sponsored plan. There are two main types:
Five Buckets, Four Shovels, a Beach and a Map | 31
short-term and long-term. Short-term is usually covers for a period of less than a year and long-term disability
kicks in when sick leave and short-term disability runs out. The period that long-term pays depends on the policy and can be for a couple years or until retirement age. Both types of disability cover a portion of our income and usually max out at 60%.
Life Insurance: Life insurance is a protection against the loss of income that would result if you were to pass
away. Whoever you choose to be the beneficiary of the policy (often your spouse or other dependent, like a child) receives the proceeds, and is financially protected in case you die. Should something terrible happen, you do not want to burden your loved ones any further than they already are.
There are two main types of life insurance, term life insurance and whole life or permanent insurance. For both
types, premiums vary dependent upon your age, health, gender, whether or not you smoke, and (for term insurance) the duration of the policies.
Term Life Insurance: As the name suggests, term life insurance is a policy with a set duration on the
coverage end. Unlike whole life insurance, term life insurance does not have an investment component.
period of your coverage. Once the term period is up, you can decide to renew the policy or to let your Therefore, you are not building cash value as you would with whole life insurance. It also tends to be less costly than whole life insurance for this reason.
Whole Life Insurance: Whole life insurance is a policy that has both an insurance and an investment
of your age or the duration that you hold the policy, while the investment component accumulates a
component. The insurance component of your policy pays a stated amount upon your death regardless cash value that you can withdraw or borrow against.
32 | Five Buckets, Four Shovels, a Beach and a Map
ANNUAL COST OF TERM LIFE INSURANCE - PREMIUM QUOTES ($1M IN COVERAGE) Non-Smoker (Preferred) Age (Years)
25
30
35
40
50
65
Smoker (Preferred)
Term
Male
Female
Male
Female
10 Year
$ 410
$ 360
$ 1,140
$ 930
20 Year
$ 620
$ 500
$ 1,590
$ 1,270
30 Year
$ 960
$ 730
$ 2,560
$ 2,610
10 Year
$ 420
$ 360
$ 2,290
$ 980
20 Year
$ 660
$ 540
$ 2,790
$ 1,450
30 Year
$ 1,020
$ 800
$ 2,940
$ 2,230
10 Year
$ 430
$ 370
$ 1,280
$ 1,060
20 Year
$ 710
$ 600
$ 2,080
$ 1,760
30 Year
$ 1,060
$ 890
$ 3,470
$ 2,620
10 Year
$ 570
$ 490
$ 1,880
$ 1,500
20 Year
$ 950
$ 770
$ 3,180
$ 2,460
30 Year
$ 1,550
$ 1,200
$ 5,450
$ 3,910
10 Year
$ 1,280
$ 950
$ 4,360
$ 3,290
20 Year
$ 2,230
$ 1,640
$ 7,780
$ 5,710
30 Year
$ 3,860
$ 2,680
$ 12,710
$ 8,210
10 Year
$ 5,840
$ 3,540
$ 16,870
$ 10,380
20 Year
$ 11,880
$ 7,310
$ 31,110
$ 37,950
30 Year
N/A
N/A
N/A
N/A
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Regular premiums pay the insurance costs and contribute to equity growth in a savings account where dividends or interest is allowed to build up tax-deferred.
As you can see in the chart to the right, the annual price for term insurance varies with your health, whether or
not you are a smoker, male or female, your age and the length of time that you would like to have the insurance in effect.
HOW DO YOU USE LIFE INSURANCE:
Most term insurance is either used to protect a family from the sudden death of the principal income earner when there are young dependents or in a closely held business where there is a buy-sell agreement to purchase one owner’s equity in the event of a death. For purposes of this book we will focus on the family situation.
In many families, the risk of one parent suddenly dying and leaving the survivor with a house, a mortgage, and
young children who have many needs—including the cost of education—and just the ability to cover household expenses, without a second or primary paycheck, is a scary thought. Term Life Insurance:
Term insurance is a great safety net or a “bridge to the future” in this case. The picture to the right shows a young family whose husband/father has suddenly died. The picture shows the wife with three children using “term insurance” as a bridge to get over the lost earnings that a sudden death brings. In this case, it is a bridge for 20 years. The picture depicts a storm in the year 2000, but across the bridge the sun is shining in the year 2020.
While the amount and length of term insurance depends on the facts at the time, a simple estimate might include
34 | Five Buckets, Four Shovels, a Beach and a Map
Five Buckets, Four Shovels, a Beach and a Map | 35
enough to pay off a mortgage and replace 4-7 years of pretax earnings. Some people also like the idea of adding enough term insurance to pay for the cost of their children’s education.
Your insurance advisor (shovel) can help you determine the amount of term your family will need and for how long. It is also advisable to consider layering different amounts of term insurance for varying periods of time. For ex-
ample, if one of your major concerns is to provide for your children’s education as they get through school you will need less insurance. Another example is having enough insurance to pay off your home loan, but as time goes on the amount of the loan decreases as well as the amount of insurance needed. Whole Life Insurance:
The second type of insurance is whole life. Whole life has a term portion associated with it where a portion of the premium pays for the insurance, but also allocates a large part of the premium as an investment that grows tax-
free. This is referred to as the “cash surrender value” of the policy. As this builds up over time a family can either use it as an additional death benefit, or it can be used as a retirement asset.
Like with term insurance, the amount of the premium depends on the person’s age, health, history of smoking, the amount allocated towards the cash surrender value, and whether you are male or female. The chart on the next page gives some ranges of premiums under various circumstances.
The chart on the next page shows how whole life insurance can grow over time and compares it to the cost of
term insurance over time and shows how, over long periods of time, whole life insurance is a better investment.
However you must remember that there is no guarantee that you will live through the end of the term policy period. That is why a combination of term and whole life insurance should be considered especially if you have a family to protect.
36 | Five Buckets, Four Shovels, a Beach and a Map
COST OF WHOLE LIFE INSURANCE - PREMIUM QUOTES ($1M IN COVERAGE) Individual
Female, Age 25
Annual Premium
$ 7,230
Female, Age 40
$ 13,240
Female, Age 55
$ 26,900
Male, Age 25
$ 8,410
Male, Age 40
$ 15,790
Male, Age 55
$ 33,300
Policy Duration
Premium Paid
Cash Value
Death Benefit
20 Years
$ 144,600
$ 194,463
$ 1,231,140
30 Years
$ 216,900
$ 397,129
$ 1,402,662
40 Years
$ 289,200
$ 692,030
$ 1,619,135
20 Years
$ 264,800
$ 378,634
$ 1,335,489
30 Years
$ 397,200
$ 760,740
$ 1,637,629
20 Years
$ 538,000
$ 715,883
$ 1,526,737
30 Years
$ 807,000
$ 1,470,713
$ 2,117,367
20 Years
$ 168,200
$ 222,323
$ 1,236,239
30 Years
$ 252,300
$ 457,799
$ 1,422,700
40 Years
$ 336,400
$ 807,406
$ 1,664,150
20 Years
$ 315,800
$ 445,605
$ 1,356,282
30 Years
$ 473,700
$ 943,872
$ 1,770,822
20 Years
$ 666,000
$ 846,929
$ 1,576,446
30 Years
$ 999,000
$ 1,709,783
$ 2,254,106
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How is it used?
Life-Span/Growth of Cash Value of Policy
The picture to the right is an illustration on how the cash value can grow over time. The picture is called Mount
Whole Life Insurance. It shows a young couple starting out in life. As they meander through life they start a family, and sooner than you can imagine the kids are older and on their own, and the parents have choices to make
on what to do with the built up cash value of their whole life policy. As they get to retirement age, the cash value
of the policy has grown and they have the choice to take money out of the policy as an additional retirement benefit, or to keep the insurance in place and use it as part of a death benefit or estate plan. If they keep the policy in place it will continue to grow. On the other hand, if they borrow against it and use it as a retirement benefit it will get smaller.
This is an excellent example of how this bucket might be emptied into other buckets with the help of the shovels.
In this case it could be all four shovels (the CPA, the estate attorney, the insurance agent and the investment advisor) working together on the plan.
As your family situation changes, your insurance needs, including umbrella and life insurance, should be evaluated every couple of years.
While this doesn’t try to cover all situations, it makes the concepts of insurance planning easy to understand. In-
surance changes as your family changes. A single person’s insurance needs are much different than the needs of
a married couple. In the same manner, as the couple begins to have children, additional insurance needs must be met. As the children grow older, the insurance needs continue to change and evolve the same way that a beach slowly changes.
38 | Five Buckets, Four Shovels, a Beach and a Map
Retirement Assets Bucket The third bucket is retirement assets. These are 401(k)s, Individual Retirement Accounts
(IRAs), pension accounts and the like. For the most part these retirement assets accumulate during your working career. For our purposes we also group Social Security into this bucket as for most people social security begins to pay out once they stop working. On an annual basis they increase from contributions (made by either you and/or your employer) plus the
annual growth in value. They could have a “tax-free� aspect if you use the ROTH IRA feature. For most people this bucket will grow gradually over time, and depending on your age and how close you are to retirement age and your risk profile, the asset allocation will change from more risk in your younger years to less risky as you get closer to retirement.
There are some required distributions that need to be made based on your age and the balance in the account.
The Retirement Bucket can grow quite large and be a major component of your net worth and a large contributor to your after work cash flow. Your CPA Shovel should work with you to calculate distributions over a long period.
The Retirement Assets Bucket contains assets that are specifically intended for use during retirement. During your working career, these assets are allowed to accumulate over time in the Retirement Assets Bucket, before being transferred into your Liquid Assets Bucket at retirement age.
Essentially, during retirement the assets in this bucket will replace the monthly paycheck you earned during your working career, thus making it critical to begin growing the assets in this bucket early.
40 | Five Buckets, Four Shovels, a Beach and a Map
The different types of assets in this bucket grow and appreciate, both through your own contributions (and those
of your employer if your retirement plan is employer-sponsored), and the annual growth in the value of the assets. For most people, this bucket will grow over time. Growth occurs because, depending on your age, how close you
are to retirement, and your risk profile, the asset allocation will change from mostly equities and little fixed income bonds to less equity and more bonds. The picture to the right is a simple way of looking at retirement savings. The picture shows a mountain called “Mt. Retire-
ment�. On one side it shows a person climbing the mountain
with their skis. The skis repre-
sent a person’s leisure life in re-
tirement. The person is sweating climbing up Mt. Retirement; it is not easy to save for retirement,
but every dollar you save means that the skiing down the other side of the mountain will be a
longer and more enjoyable ride.
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There are a variety of different types of retirement plans and assets and we will discuss the variety of options below.
Types of Retirement Assets: Employer-Sponsored Plans:
There are a variety of retirement plan types if your employer offers a retirement plan. Like medical insurance, employers will often use these plans as an employment benefit. The type of plan your employer offers is dependent
on a number of factors, including the size of the organization, if it is a for-profit or non-profit firm, and other factors. We will discuss some of the most common plan types. 401(k):
A 401(k) plan is the most common retirement plan offered by employers. Essentially, a 401(k) allows you to choose to defer a percentage of your paycheck to an account within the plan. Typically, those plan contributions are invested into a portfolio of mutual funds, but can include a variety of other investment options like stocks and
bonds. The amount that you defer is not taxable until it is taken out of the account or withdrawn from the plan. It is very important to be aware of how your employer contributes to the plan. 401(k)s are defined contribution
plans, meaning that your account balance is determined by your contributions to the plan and the performance of
your investment portfolio. Your employer is not required to make contributions to the plan (similar to pension plans, as discussed below), but many choose to match your contributions up to a certain percentage. Some employers may make a profit-sharing contribution based on the performance of the company throughout the year.
For 401(k)s, it is important that you strive to contribute enough from your paycheck to receive the maximum amount available from your employer.
42 | Five Buckets, Four Shovels, a Beach and a Map
Roth 401(k):
Your employer may offer a Roth 401(k) retirement plan, which is similar in structure to a regular 401(k) plan, but is funded with after-tax deductibles from your paycheck. This is a great option if you’re young and intend to be in a higher tax-bracket by the time you reach retirement age. Once you reach 59.5 years of age, any withdrawals you make on the account (including any investment earnings) are tax-free. It also has no income limitations for those
who want to participate (unlike Roth IRA, as discussed on page 45) and you can invest up to the allowable contribution limits.
Pension Plans:
Your employer may offer a pension plan, a type of retirement plan in which your employer makes contributions to-
ward a pool of funds for your future benefit. Essentially, your employer is contributing to the retirement account on your behalf. These employer contributions are often tax-exempt.
There are two types of pension plans (like many other retirement plan options), defined-benefit and defined-contribution. In defined-benefit plans, your employer promises you a set amount when you retire, regardless of how
the investments perform. In defined-contribution plans, your employer makes a set contribution on your behalf, but the amount you receive on retiring depends on the performance of the investments. Retirement Plans for the Self-Employed:
Virtually any retirement plan that is available to a large organization or business is available to you if you are self-
employed. Deciding on a plan may seem difficult (talking to your CPA Shovel, as discussed on page 54, may help), so it may make sense for you to focus on the plan features that best suit your needs. You may choose a plan that minimizes the amount of taxes you will have to pay. You may choose a plan that simply allows you to save as
Five Buckets, Four Shovels, a Beach and a Map | 43
much as possible for retirement. For some people, it may be important to take into account plan flexibility if you
are unsure whether you want to maintain the same contribution amounts or if you don’t want to make a plan contribution at a specific time.
We will discuss some of the most common types of retirement plans for the self-employed in further detail. Individual Retirement Arrangement (IRA):
Don’t worry - if you’ve always thought that IRA stood for individual retirement account, you aren’t the only one. An IRA retirement plan allows you to contribute all of your income from self-employment, up to a set maximum
dollar amount. It may be tax-deductible based on your income, your tax-filing status, and any other coverage that you may have through an employer-sponsored retirement plan. With an IRA (unlike a Roth IRA, as discussed below), any withdrawals that you eventually make from the plan are taxed as income, including any gains you may make on investments.
Since your income might be lower after the liquid cash flow from your paycheck slows or stops and your retirement assets take their place, the income tax rate on those withdrawals could be lower than while you were working. Roth IRA:
A Roth IRA is very similar to a Roth 401(k) except it is not an employer-sponsored plan. However, the same rules apply that once you make the after-tax contributions, your account grows and you are able to take distributions from the account after age 59.5 tax free.
Pretend that there are three brothers named Saver, IRA, and Roth. Each brother saves the same amount for retire-
44 | Five Buckets, Four Shovels, a Beach and a Map
ment beginning at age 21, but each one chooses to invest in
the account that they are named
after. Assuming that each brother
faces the same tax rates and their investments grow at the same rate, Roth is the brother that
comes out on top. Even though
he was being taxed more initially than IRA, the money that he in-
vested was able to grow for years and he removed it tax-free upon retirement. The story of these
Saver
IRA
Roth
Total Dollars Saved
$ 940,748
$ 940,748
$ 940,748
Less Taxes Paid Upfront
$ 355,477
$ 131,571
$ 355,476
Net To Invest
$ 585,002
$ 808,907
$ 585,000
Total Distributions/Balance
$ 2,554,538
$ 5,115,981
$ 6,836,203
After Tax Net Profit
$ 1,969,536
$ 4,307,074
$ 6,251,203
Total Taxes Paid
$ 1,355,439
$ 2,263,895
$ 355,476
Each person will start saving when they are 21 years old. Tax rate will change from 25% to 30% to 40% and back to 30%. All investments earn 6%. People will invest until they are 65 years old. Distributions will go from 66 to 102 years.
three brothers is illustrated on the right and shows that saving for
retirement in a Roth IRA can be the best choice if you are young and have a long career ahead of you. SEP-IRA:
If you are self-employed you can create a retirement plan called a Simplified Employee Pension (SEP-IRA). A SEP
is very easy to set up and doesn’t need to be filed with the IRS. This makes it a lower cost option, especially if you
don’t have any employees. If you do have employees, then a contribution would need to be made for them as well. For example, if you contributed 10% of your income to the SEP, then you would need to contribute 10% of your
Five Buckets, Four Shovels, a Beach and a Map | 45
employee(s) compensation as well. Investing in a SEP-IRA can also be beneficial since contributions to a SEP are tax deductible.
Social Security:
If you are a U.S. citizen, a permanent U.S. resident, or if you work in the U.S., a percentage of your payroll-tax
deducted every payroll cycle is collected by your employer and placed in the Social Security Trust Fund. It is a
federally-operated social insurance and benefits program that includes not only retirement income and disability income, but also Medicare, Medicaid, and death and survivorship benefits.
Social Security planning should be updated as part of your overall financial plan. Your CPA shovel can help you figure out the best time to begin drawing these benefits. Currently you can begin to draw your social security
benefits when you are age 62, but if you wait until you are age 66, you’ll receive 100% of your benefits and each
year you wait will benefit you roughly 8% more. So, if you wait until age 67, you’ll get 108 percent of the monthly
benefit because you delayed getting benefits by 12 months. If you wait until age 70, you’ll get 132 percent of the monthly benefits because you delayed getting benefits by 48 months. If you continue working during that time, that extra income can help your retirement savings. Source: https://www.ssa.gov/planners/retire/1943-delay.html
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Personal Assets The fourth bucket is your personal assets. These include all of the physical things that you buy over time such as your house, your car, a second home, art and jewelry, boats, and
airplanes. These types of assets will vary greatly between people but there are a few general concepts that usually hold true for almost everyone.
First, other than minor purchases such as household items, clothes and other small items,
many of these assets have a mortgage associated with them. Second, if there is an associated mortgage they often involve some sort of down payment, usually in the 20% range.
Third, in the case of real estate, these assets usually appreciate over time and as the debt is paid down the “equity value” increases due to appreciation and debt reduction. Fourth,
often as a person’s overall wealth increases, the number and value of these assets will increase as well. Fifth, usually as debt is paid down and the value of assets increase, these personal assets can be used to fund family ex-
penditures such as another purchase or educational expenses. This is usually done via refinancing or borrowing on a Line of Credit secured with a second deed of trust. Sixth, as a person grows older and gets closer to retirement, they might be motivated to liquidate some of these assets.
A nice thing about personal assets is that as you build equity, you can use that equity to acquire more personal
assets. This is illustrated in the chart on the next page with three families—the Smith Family, the Jones Family and the Peters Family. All of the families decided to purchase a home where they can start a family. Each family makes a $100,000 down payment and takes out a $400,000 mortgage. The Smith Family takes out a 30 year mortgage
while the Jones and Peters families take out 15 year mortgages. All of the mortgages are at 5%. Also assume the
Five Buckets, Four Shovels, a Beach and a Map | 47
properties all appreciate at 3% per year. One day, the Peters
Family realizes that they want to live in a bigger home and after
15 years of paying off his mort-
gage he decides to acquire a $1 million property. Using their eq-
uity they buy a new property for
$1,000,000 and only need to take out a $200,000 mortgage which
will be paid over 15 years. Even
though he does have to take out
Smith Family
Jones Family
Peters Family
Total Mortgage Principal Payments
$ 400,000.00
$ 400,000.00
$ 600,000.00
Total Mortgage Interest Paid
$ 380,617.22
$ 178,053.73
$ 267,080.59
Total Mortgage Payments
$ 780,617.22
$ 578.053.73
$ 867.080.59
Property Value (Year 31)
$ 1,213,631.24
$ 1,213,631.24
$ 1,512,589.72
Net Profit (Year 31)
$ 433,014.01
$ 635,577.51
$ 645,509.14
Each family paid $100,000 down payment on a $500,000 home in Year 1. Each mortgage had a 5% interest rate. Property values grow at 3% annually. The Smith family took out a 30-year mortgage; the Jones family took out a 15-year mortgage and the Peters family took out a 15-year mortgage, but purchased a new home worth $1M using built up equity in Year 17.
a new $200,000 mortgage, at the end of year 31 he has finished
paying off his debt and his property is worth much more than the Smith and Jones families. When personal assets are purchased they often use up some of the money in the Liquid Assets Bucket and when they are liquidated they usually produce a lot of cash that can be added back to that bucket. Unlike the assets in all of the other buckets, there usually is a lot of filling and emptying this bucket over the course of one’s life. Sev-
eral examples of personal assets that you might own throughout your lifetime are shown in the picture on the next page.
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Investment Assets The fifth bucket is your investment bucket. Not all people actually use this bucket, but in
cases where it is used it can easily become the largest of all of the buckets and give you the most long-term financial security. This bucket contains those non-liquid investment assets,
such as rental real estate, your company(s), long term non-liquid investments, or an expected inheritance.
Throughout a person’s working life, if they own a company and that company is their major
source of income the salary and wages from this asset are added to the Liquid Assets Bucket. However, the increase in value stays in the Investment Assets Bucket until there is a liquidity event. If there is a liquidity event, the proceeds are added back to the Liquid Assets Bucket.
With proper planning and a well thought out exit strategy, liquidating a major investment asset can add a lot of value to the Liquid Assets Bucket and provide you with enough assets in that bucket to supplement your cash flow from the other buckets.
In many cases, if a person uses investment assets, like rental real estate, to supplement their annual income, there may never be a liquidity event for them. This is due to the fact that many times it is often more beneficial to pass these assets to other family members through a well thought out estate plan.
As a person adds to these buckets over the course of their life, the investment plan might only need to be updated once or twice a year. As the person gets closer to “retirement” and begins planning to live off of these assets, the investment
advisor’s work is more frequent and should move to 3-4 updates per year. This ensures that the person will receive pro-
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fessional guidance that will help them navigate through fluctuations in the market and other issues that might arise. Aside from investing in businesses or rental real estate, many people also choose to invest in financial markets
where they invest their money with the goal of a financial asset growing in value, along with providing interest and dividends. There are four types of traditional financial assets that one would use to seek earnings: 1. Cash or Money Market funds (not a great choice for investment in our zero interest rate environment — however, this is a great vehicle to act
as a liquid emergency fund) — During the past 80 years, an investment in cash represented by the one-month US Treasury Bill has yielded an
average return of 3.6%. During the same time period, inflation has averaged 3.5%.
2. Bonds – Bonds are loans to governments or companies where you earn interest and then are paid back the principal investment at an agreed upon future date. Where cash investments returned 3.6%, long-term corporate bonds on average returned 6.2% per year.
3. Stocks – A share of stock represents equity ownership in a publicly
traded company. Stocks are the most risky of the three traditional asset classes. However, with risk, comes great opportunity for reward. Throughout the past 80 years, cash returned 3.6%, bonds returned 6.2%, and stocks returned 10.8%.
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4. Mutual funds – Investing in mutual funds is a great choice for a person that does not have the knowledge or time to invest in individual securities. When investing in a mutual fund, shareholders invest a certain amount
and a fund manager uses the funds to invest in a diverse array of holdings based on the stated goals of that
particular fund. Funds can be actively managed, where a manager trades, buys and sells stocks or bonds on a
regular basis in hopes of beating the market, or passively managed, where fund managers “track� an index like
the S&P 500 by purchasing the same shares in an identical proportion with the goal of reaping the same returns as that index. We will focus more on active vs. passive investing in Chapter 4.
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~ Chapter Four: The Shovels ~ The shovels are all different. In most cases people ought to think of them as one basic shovel for everyday work
and three specialty shovels for other important tasks. All of the shovels are important and all are needed to “do the job� over the long term.
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The Shovels The shovels represent the professionals who have the training and experience to guide you through the ongoing
process to most efficiently fill and empty the buckets at the right time. They also help you organize your financial affairs in order to protect you and your family in times of crisis or upheaval.
CPA (Certified Public Accountant) Shovel The first shovel is the CPA, who has the best ability to act as the quarterback and direct the other shovels. The
rationale is simple. The CPA should be involved in your tax planning and financial planning on a frequent basis. I
recommend at least three “touches” on an annual basis. The “touches” usually involve a) preparation of taxes, b) update of the financial plan, and c) year-end planning and tweaking.
Many CPAs want to be a “trusted advisor” for their clients, but they seem to lack the desire to jump in and take
charge of a client’s financial wellbeing. Their primary focus is taxes and tax planning and that leaves a huge gap for the client. As a result most clients seldom move forward with a plan to achieve financial security.
Attorney Shovel One of the main reasons that it is important to have an attorney is to keep your estate plan up to date. An estate plan consists of a variety of documents, including a will and trust, which say what you want to happen to your
assets when you die. This plan ought to be reviewed every five years or so, whenever there is a major life change such as a death, a birth or a sickness.
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There are estimates which state that around 60-70% of people die without an estate plan. It is important to create a detailed estate plan explaining your wishes for your property, money and other assets because if you don’t, the state you live in will create one for you that isn’t in line with your wishes.
The kindest gift that you can give to your family is instruction on how you want your assets to be distributed. An estate plan answers questions like, “Where are my assets going to go?” and “Who will help distribute them?” If
you have children under age 18, who will take care of them? It can add to the emotional burden placed on your loved ones, who are left to sort out the situation with no guidance.
An estate plan doesn’t have to be complicated and expensive, although more planning is required if you have a
higher net worth. A single person can transfer up to $11.4 million and a married couple can transfer $22.8 million
without it being subject to federal estate tax. Over 90% of Americans can transfer all of their assets without being subject to any federal estate tax. Some states also have an inheritance tax so it is important to check the laws in your resident state.
A simple estate plan consists of three documents: A Will, Durable Power of Attorney and a Health Care Power of Attorney which goes by many names, such as Health Care Directive, Living Will, and DNR (Do Not Resuscitate). The latter two documents are for when one becomes terminally ill.
Most states have statutory forms for the Durable Power of Attorney and Health Care Power of Attorney. You
choose someone, usually a family member or friend, to make decisions if you are incapacitated either temporarily or permanently. The Durable Power of Attorney takes care of financial and business matters. The Health Care
Power of Attorney allows someone to make your medical related decisions if you are unable to do so yourself. You
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should name a backup person (“successor”) for both documents if the initial agent cannot serve for any reason. The powers authorized in both of these documents end upon death. That is when the Will takes over.
A Last Will and Testament is a letter of instructions to the local court stating what you want done with your prop-
erty and who is responsible for carrying out your wishes. That person is called an Executor or Personal Representative. Wills can contain Trusts to be set up after you die, sometimes for a surviving spouse, but also for children
or a loved one with special needs. Individual circumstances will determine if a Will should contain a Trust. Wills are administered by the probate system in each state. The probate judge appoints the person that you name as your Personal Representative to act on behalf of your estate. The Personal Representative pays creditors, distributes assets, and carries out other tasks like obtaining valuations and filing tax returns.
In many states, the probate process is time-consuming and expensive. Many people who own a home choose to
establish a Revocable (aka Living) Trust to hold all of their assets. Before death, a Revocable Trust can be changed
at any time, or revoked completely. After death, the Revocable Trust usually cannot be changed (it becomes irrevocable) although for married couples in most states, up to one-half of the Trust can still be amended or revoked by the surviving spouse. If properly set up and funded, most Revocable Trusts will avoid the entire probate process.
The successor trustee, appointed in the trust document, will handle the bill-paying, distribution of assets and any other important details.
Some assets are not transferred through a Will or Trust but through beneficiary designations. An example of this
is a retirement plan, such as an IRA, 401(k), or pension plan. Life insurance policies are also transferred to beneficiaries, and most bank and investment accounts can be transferred by using what is called “pay on death” (POD) or “transfer on death” (TOD) designations. It is very important to be careful about owning property jointly, either
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as joint tenants or tenants in common, even with a spouse. There are many unintended consequences from joint ownership, not the least of which is that creditors can attack your interest if the other joint owner has a money judgment entered against him/her, is insolvent and/or goes into bankruptcy. To summarize, here are the basic documents you need: 1. Durable Power of Attorney
2. Health Care Power of Attorney 3. Will
4. Revocable Trust Failing to plan is planning to fail. Give the gifts that your family will appreciate: direction and guidance.
Investment Shovel The third shovel is your investment advisor who can help you allocate your assets in buckets two and three to the
appropriate level of debt/equities, risk, domestic/international, tax free/taxable and other such choices. The investment advisor needs to work closely with the CPA/financial planner to place your assets in the right investment ve-
hicles at the right time of your life cycle. It is a good idea to have an investment professional help you. Even though you might think that you can invest yourself, investing can become very emotional and having an advisor who can
help you through the emotional times of either low (Bear) markets or exuberantly high (Bull) markets will be of great benefit in preventing emotional mistakes.
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Here are the predominant ways that professional investment advisors work today: Active Investment Management
Active investment management is usually done with individual stocks or mutual funds. Some advisors will either
attempt to beat the market themselves or they will try to find mutual fund managers with great track records who consistently beat the market. This sounds pretty good.
Unfortunately, research shows that no one can beat the market over long periods of time. Research also shows
that last year’s winner will likely not be this year’s winner. Expense ratios or fees for actively managed investment portfolios average between 1% and 2%. It’s this management and research cost that contributes to the drag on long-term performance of active investments and ultimately contributes to the superiority of the passive investment approach.
Passive Investment Management
The approach that we think is best is the passive investment approach. Research shows that between 65% and
90% of the time (depending on the asset class and time frame) active managers do not beat their benchmarks. We would rather invest in the entire market than spend our client’s money trying to figure out which individual stocks or mutual fund manager might win. Research shows that in the long run, active management is a loser’s game.
Instead, we’ll take the upper third of performance year-in and year-out without spending the time and effort to try
to win the loser’s game. Instead, we spend our time and effort understanding our client’s individual financial goals
and engaging in comprehensive planning to maximize a client’s resources through tax, insurance, and estate planning, all integrated with investment planning.
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Core-Satellite Approach
Some advisors are “on-the-fence” and take a core-satellite approach to active vs. passive management. They
agree with the above logic regarding passive investments, with most of a client’s money, but will carve out some of the portfolio to “roll-the-dice”. Annuities
Other advisors use annuities which are investments offered by insurance companies. There are many different types of annuities. Basically, annuities often guarantee that the initial investment made will not lose value and
some good variable annuities will guarantee appreciation based on a client’s age and life expectancy. For this
guarantee, the insurance company will take the risk and compensate themselves for the risk in the form of higher fees. For some clients, it makes sense for a portion of their portfolio to be guaranteed against loss. However, to
consider putting an entire portfolio into an annuity is usually a bad idea because the higher fees can hinder growth when considering inflation. Beware of a financial advisor who either recommends an annuity as the only investment option or one who claims that all annuities are bad for all clients.
Insurance Agent Shovel The fourth shovel is your insurance agent, who can provide you with all different types of coverage including life,
disability, medical, and indemnity insurance. For most people, medical insurance is attained through their job, but planning must be done to ensure adequate coverage once a person is no longer working.
Indemnity insurance includes auto, home, and umbrella insurance, and there must be enough coverage to protect your overall net worth. Life insurance is usually a combination of term and whole life, and as previously discussed
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in bucket one, can vary depending on whether it is used for family protection of a wage earner, estate planning, as a retirement supplement, or a combination of all three.
It is important to shop around when purchasing an insurance policy to make sure that you are not overpaying.
When comparison shopping, make sure to first figure out how much coverage you need so you don’t just look for the cheapest policy that does not provide enough coverage. You should also determine the financial strength of the insurance company that you’re purchasing from, as you don’t want to find yourself in a situation where you
file an insurance claim and you can’t get the money that you need. If you are a high net worth individual, it is also a very good idea to purchase an adequate amount of umbrella insurance as it is very inexpensive while providing millions of dollars in additional liability coverage.
Picking the right advisors is a challenging process. Here is what we know - the four advisors that provide a holistic view of financial security are a CPA, attorney, investment advisor and insurance advisor. However, the optimal
solution is if one of your advisors can double up on those responsibilities, such as a CPA also handling your insurance. Another important note for your advising team is that you want to find local advisors. Some say distance
makes the heart grow fonder - this is not the case. You want your advisors available, in person, when you need them.
Now you know what advisors you need. But how do you begin to find them? First, think of 5-10 friends who you
consider to be successful. Then, ask those friends about their advisors. Ask them who they are, if any of them can double up on their duties, why they like them, etc. Don’t be afraid to ask too many questions about their advisors. Having a plan to one day comfortably retire is crucial. Your friends will be happy to help you and be part of your journey to financial security.
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The Shovels Working Together For most people, five buckets and four shovels is a lot to manage and we strongly recommend that one of the
shovels takes charge. Also, in many cases one person can play several roles at the same time and therefore work with you in an organized fashion. Depending on your overall level of personal financial knowledge, the amount of energy that you want to devote to your financial planning, and the ability of your “shovels” to multi-task, you can organize the team in the most logical sense for you and your family.
You should find the advisor or shovel that is your most trusted advisor and have them play quarterback as the fi-
nancial planner. In many firms there are now CPAs that have the experience to handle your investments and insurance along with your taxes. If you are comfortable with this and can find the right person, it is a great solution.
For the financial plan to work, it requires a lot of teamwork between the four shovels. The picture on the next page shows the advisors together with the family reviewing the map and tweaking the plan as needed. The picture is
very important to understand. The picture is labeled “team work” which is completely true. Unless there is coop-
eration between the various advisors and the family to create and adjust your long-term plan, the chance of suc-
cess is limited. When your attorney, CPA, investment advisor and insurance agent work together to help you build a long-term financial plan, success is achievable.
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There are several features of the picture that should be pointed out: First, it shows the whole family being involved in the process. Often, parents don’t get their children involved at an early enough age. Obviously there is the right time to start this process, but it is usually earlier than you think.
Second, it shows the advisors working together. Too often the advisors work in a vacuum and instead of working together they give the client competing and conflicting advice.
Third, there is an empty chair. This represents the other advisors — bankers, real estate agents, consultants — that may be needed from time to time. There should always be room for them.
Fourth, it shows everyone using the same map as they work on the overall plan, adjusting and tweaking it as circumstances dictate.
This combination of the entire family working together with the advisors on the same map is a powerful strategy that, all things being equal, has a high likelihood of success.
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~ Part Two: The Story of Steve and Patty ~ So now that you know all about the buckets and shovels, let’s take a look and see how they actually work. Here’s a partially true, partially fabricated story about the people in my life. It starts when “Steve” and “Patty” graduate college and start their lives together, and it follows them until they begin their retirement.
Each twist and turn is drawn out on a “Life Compass”, with a compass rose in the middle showing how their buckets, shovels, interests, values, goals, and relationships are all changing. Just as a compass shows you which direction to go, each of these points on our compass are the things that propel you through your life. They are the things that matter most, and the things that make a solid financial plan worth it in the end. They are:
• Goals: Having goals keeps you motivated to accomplish tasks that ultimately improve the quality of your life. These can include getting a promotion, saving up for your child’s college fund or retirement.
• Values: Whether it’s family, volunteering or trying new experiences, values can be anything that a person finds important to their core belief system. People must have strong values in order to be successful.
• Interests: Having interests such as traveling, fitness or volunteering makes you feel fulfilled while adding balance to your daily schedule.
• Relationships: The people you surround yourself with are so important. Having a solid support system of friends, family, spouses, or anyone meaningful to you will push you to be the best version of yourself.
• Advisors (Shovels): Having a team of advisors is crucial. Your finances will change as your grow older and solid advisors will help you prepare and plan for those transitions.
• Assets/Income (Buckets): Your assets will vary throughout your life, whether it’s an investment, paying off a mortgage or owning a business. Knowing what assets you have will prepare you to plan for the future.
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Steve (25) and Patty (22):
Once upon a time, there was a young man named Steve. Steve was like most 25-year-olds—he graduated from college a few years ago and had been working at an engineering firm since he left school. He was adventurous,
and loved backpacking and traveling whenever he got the opportunity. He was close with his family, particularly his parents and his siblings.
From an early age, Steve’s parents stressed to him the importance of financial security, so he worked hard in
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hopes of earning a promotion. He earned $75,000 a year at the engineering firm, most of which he deposited into his Liquid Assets Bucket every month. As you’ve learned, the Liquid Assets Bucket is the bucket that you take
money out of in order to pay your regular expenses - such as rent, groceries, gas, and clothes—but it also holds any savings accounts that you may have. Steve made sure to put a portion of his paycheck into his savings ac-
count, which he had managed to grow to $25,000. As part of his benefits package at the engineering firm, Steve put $15,000 into his 401(k) Plan, and the firm had matched another $5,000. These assets were deposited in the Retirement Assets Bucket.
It was around this time that Steve met Patty. Patty was 22 years old and just graduated from college. Like Steve,
she was taught at a young age the importance of financial security. She was working as a designer in a small interior design firm, and earned $45,000 a year. During summer breaks throughout college, she worked hard in order
to grow her savings account, which contained around $15,000. She also made sure to continually contribute to her IRA, which was worth $10,000.
Steve and Patty shared similar goals: they wanted to maintain a steady income, to earn promotions in their respective fields, and to eventually settle down and get married. They both enjoyed traveling and were passionate about their jobs. They both believed that it was important to give back to the community, whether through charitable donations or community service.
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Steve (30) and Patty (27):
Five years passed by, and Steve and Patty’s lives changed quite a bit. They were married, and had joint assets and shared finances. Steve received a promotion at the engineering firm, and was earning $100,000 annually.
Having outgrown the small interior design firm where she worked, Patty started her own design firm. While the firm wasn’t making a profit, it still managed to break even. Throughout this time, they continued to save a percentage of their monthly paycheck and were able to add to their Retirement Assets Bucket.
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Around this time, Steve began investing his savings in the stock market. You may recall that stocks and savings
accounts are both deposited in the Liquid Assets Bucket, as the tax basis for both are close to fair market value
and the tax cost of moving assets from this bucket to others is fairly low. You may also remember from our discussion about the Investment Advisor shovel that stocks are a somewhat volatile investment, while other investment strategies reduce these risks and require a less active role in managing.
Unfortunately, Steve didn’t have the opportunity to read this book before investing around $26,000 of his sav-
ings in the stock market, and he lost nearly 50% of its value. For a newly married couple with plans to purchase a home, grow a business, and start a family, a $13,000 loss was huge.
Steve and Patty realized that it was no longer enough to pinch their pennies — they needed help to create a financial plan that would protect them against financial pitfalls that could potentially deplete all of their buckets, while simultaneously helping to fill their Retirement, Insurance, Personal, and Investment Buckets with assets.
Both Steve and Patty wanted to make sure that they would be able to retire comfortably when they chose to do
so, while still being able to expand their family and to afford the expenses that go with a family. They realized they needed help from a professional.
They were introduced to their first shovel, Rick, a CPA and a financial planner. Their neighbors gave them his
phone number because they knew they were looking for help and that Rick could meet their needs. Selecting your CPA Shovel is critical, as this shovel often acts as the team captain of the other shovels. Steve and Patty selected
Rick for a number of reasons. He was a very experienced financial planner who understood investment, insurance, and estate planning, in addition to tax and accounting. He explained the options for the financial plan in a way that both Steve and Patty understood, which was very important to them. Rick also understood their goals — both
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short-term (like getting a promotion or purchasing a home) and long-term (like having a family and having a comfortable and secure retirement).
Steve and Patty met with Rick a few times to create their financial plan. They decided to meet with Rick three
times a year to review their financial plan and statements, to do yearly taxes and tax planning, and to make sure that everything was in order. Over time, Rick became their most trusted financial advisor.
Steve and Patty turned to him for advice on when to purchase a house. He introduced them to their first alternate shovel, Bill, a real estate agent, and he suggested to wait a couple of years. Rick also suggested that Steve stop investing in the stock market and that he choose a more passive approach to investing.
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Steve (35) and Patty (32):
Steve, who was 35, was making about $150,000. Although Patty was working part time, she successfully grew her thriving business and was earning $75,000 a year. Bill, their real estate agent (aka alternate shovel) helped them
buy a house a few years ago for $500,000. They financed it with an 80% loan, payable over 30 years with interest at 5%.
Steve and Patty were faced with some big but exciting changes because their first son, Dylan, was born a year be-
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fore. Thinking about the future was now more important than ever, and their goals started to develop and change. They accomplished most of the goals that they had set for themselves five years prior, and after five years their
new goals became more similar to those of their parents. Since they bought a house, their sights were set on pay-
ing off the mortgage. They also wanted to save enough money to send Dylan to college, and asked Rick, their CPA Shovel, to set up a college savings fund for him. They continued to dutifully transfer money into that account every month.
They also called on Patty’s college friend and estate attorney Kathy to help them transfer their assets into a living trust. On top of that, they really paid attention to their Retirement Buckets and put the maximums into their individual 401(k)s each month.
Soon after, Rick, their CPA Shovel, updated their financial plan and told them it would be a good idea to get some advice about life insurance since they now had a dependent. He recommended an insurance agent he knew named Lisa and she became their Insurance Shovel.
Lisa suggested that in a year or two they should purchase a whole life insurance product that could be used as a
retirement supplement, as well as additional protection in the event of a sudden death. Since Dylan was Steve and Patty’s dependent, it was important for them to know that he would be taken care of no matter what happened.
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Steve (40) and Patty (37):
Fast-forward 5 years—Steve became one of the owners of the engineering firm and earned over $200,000 a year,
in addition to having ownership stakes in the firm that he now held. Patty’s business was still booming, and, due to the popularity of her business and the recent discovery that she was pregnant with twins, she brought in a partner to help manage the workload and minimize the financial risk of being a sole owner of a business.
Since they needed to prepare for their growing family, Steve and Patty called Bill to talk about looking for a big-
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ger house. They kept saving for their retirement as well as their more-immediate future, and also kept in mind the things that were important to them. They wanted to ensure that their children would be taken care of and well
provided for, but they also wanted their parents to be protected as they aged. Steve and Patty still shared their
passion for traveling, so they were careful to spend frugally in order to devote some of their hard-earned income to traveling. They remembered to not only be smart about their finances and save money, but also to enjoy their lives and to use their money to do the things that they wanted to do. They saved money for all of their kids, but were also able to make donations to charity organizations in their community. They wanted to be well rounded, while also staying financially secure.
To protect his family, Steve purchased a $2.5 million, 20 year term life insurance policy that would act as a bridge to the future for Patty and the kids if anything were to happen to him. Steve and Patty also bought variable life
insurance for each of their kids during this time period. They did this because they knew the premiums for these
policies would be very inexpensive since Dylan, Nicola, and Kenzie were all so young. Also, since variable life poli-
cies have a cash value component that can be invested in the market, they overpaid the premiums so more money would go to the cash value account and the funds would grow in value over time.
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Steve (45) and Patty (42):
Steve and Patty ended up buying the larger house with Bill’s help, and welcomed their new baby daughters, Nicola and Kenzie, into the world. They borrowed some money from their Retirement Buckets for the down payment, but because of their excellent credit and low interest rates, they were able to lock in a loan with the best terms available.
At this point, they still wanted to grow their Investment Bucket, and Rick told them that this was a good opportu-
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nity for them to do it. He convinced them to keep the old home to rent out, even though it could be considered just another added expense.
Cash was tight with three children, a larger mortgage to be paid, and the various expenses that go along with
having a family. The kids were all in school so Patty decided to go back to work full-time to help balance the family budget. Her business was still flourishing and she brought in a couple more partners to meet the needs of her rapidly expanding business.
With sound advice, patience, and diligence, Patty and Steve learned important saving habits that became routine over time. Despite the expenses that came along with three kids, they were still able to save like they had been
their entire lives so they could provide their family with the life they wanted. Their values and interests stayed constant, while their goals progressed and they stayed focused on accomplishing their goals.
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Steve (55) and Patty (52): Life was certainly a busy time. Dylan was in college, but because money was carefully saved towards college,
Steve and Patty actually cut their annual cost of education. The cost of private high school stopped for Dylan as he started college. Each month for the last 18 years, Steve and Patty allocated some of their savings for Dylan’s college education. Since he was in college and there was enough money saved, they no longer needed to fund Dylan’s college. Instead Steve and Patty reallocated some of their cash flow that was paying and savings for
Dylan’s college to a long over due family vacation to Europe. In addition they increased the savings for Kenzie and Nicola’s college fund.
A couple of years later, Kenzie and Nicola were in college and Dylan was getting ready to graduate. Since the kids college accounts were fully funded at this point, money no longer needed to be set aside for these needs. However, they also had more expenses to track as like auto insurance premiums, medical expenses, etc. The family
decided it was time to review their entire financial plan. Steve also picked his retirement date to be when he turned 65 and asked his advisors to rework the plan—life insurance, estate plan, financial planning to incorporate the retirement date.
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Steve and Patty (65 and 62)
Steve’s planned retirement date was well coordinated and as the date approached, the family realized that their
plan had worked. Thanks to careful strategizing and saving, he was able to meet that date. Over the years, Rick
continued to meet with Steve and Patty to ensure that all of their buckets were prepared for the approaching retirement. Rick also introduced Steve and Patty to his daughter, Tallie, who was following in her father’s footsteps as a CPA and financial planner. She became their CPA Shovel when Rick decided to retire.
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Steve sold his stock from the engineering firm back to the company, and was able to make a healthy profit from
it. At this point, the assets that had been growing in the Retirement Assets Bucket were gradually transferred over time into the Liquid Assets Bucket to supplement the loss of a steady paycheck. This is often done under the di-
rection of the CPA Shovel, and possibly with the help of the Insurance Shovel, the Investment Shovel, the Attorney Shovel, and potentially some of the alternate shovels as well.
Patty and her partners sold their interior design firm to a large competitor, but they continued to work there. Patty
chose to not retire at the same time as Steve, and continued to earn a steady income on top of the proceeds that she earned from the sale of the business.
Dylan, Kenzie, and Nicola all graduated from college, and started their careers. Steve and Patty introduced the
concept of long-term financial planning to their children, and bought them whole life insurance policies so that they could begin filling their own Insurance Buckets. Dylan got married, and he and his wife had two children.
Steve and Patty met with Kathy, their Attorney Shovel, to update their estate plan to include their grandchildren. They also set aside a portion of their assets to be given as charitable gifts. You may remember that charity and community service were important values for them throughout their lives, so it made sense for them to include some sort of charitable giving in their estate plan.
On May 24, 2022 Steve had his retirement dinner from the company. There was a large group of people attending the party and when Steve got up to make a speech it was an emotional moment. Steve thanked everyone
he worked with, told a few jokes and kidded about his new life of relaxation. Then he walked to the center of the
stage where there was a large box. He opened the box and proceeded to take five buckets, four shovels, a lot of
Five Buckets, Four Shovels, a Beach and a Map | 79
sand and a map out of the box. He turned to the audience and said. “I have had a great career, spent almost 40 years with the love of my life,
raised three children. We are certainly not rich, but we have done pretty good for ourselves and can now enjoy
our retirement without worrying too much about money and financial security. And then he started to shovel sand
into the buckets and told everyone the story of “Five Buckets, Four Shovels, a Beach and a Map” and encouraged everyone to think about their own shovels, the sand they’ll add to their own buckets and how they’ll navigate their own map.
80 | Five Buckets, Four Shovels, a Beach and a Map
~ Part Three: Building Your Own Plan ~ We have now explained the concepts behind “Five Buckets, Four Shovels, a Beach and a Map� in Part One. In
Part Two, we used the concepts from Part One to essentially tell a true story of financial planning over a 40 year
lifetime as two people got married, raised three children and then retired. In Part Three we will give you practical advice and show you how to put these concepts into practice at different stages of your life.
Ages 20-40 Between the ages of 20 and 40 most people are focused on starting and developing a career. Throughout these
early years of your career, a key part of your success will be learning how to develop a budget and stick to it. As
a young professional entering the workforce, it will be easy to spend money carelessly as you likely aren't used to having a steady income and the freedom that comes along with it. Saving for the future and retirement also won't seem like a huge priority as it will be many years away.
However, we are here to tell you that you should be rational and have a financial plan that emphasizes your sticking to a budget. Budgeting is an important practice because if you choose to live beyond your means you could
easily rack up debt that will hinder your financial and personal growth for years to come. One easy way to avoid unnecessary debt is to use automatic payments to ensure that your credit cards are paid off every month. Also, you should strive to save for retirement at an early age because there will be a long time for the money that you
invest in an IRA or 401k to grow due to compound interest. We also encourage you to have some funds set aside in an "emergency savings" that you can take money out of for unforeseen circumstances like unemployment, car
repairs, and medical bills that aren't covered by your health insurance. You should also strive to find advisors that
Five Buckets, Four Shovels, a Beach and a Map | 81
you trust and who will work with you to develop and monitor your financial plan. Another important financial goal to strive for during this stage of your life is owning a home. Purchasing a home will likely seem intimidating at the time, especially since most people will have to take out a mortgage to do so.
Even so, it would be a smart move to purchase your first home as soon as it is feasible within the parameters of
your financial plan to do so. It is understandable that almost everyone will have to rent a property as they are just getting started and saving money. Unfortunately, the money that you spend paying rent each month just goes
away. On the other hand, monthly mortgage payments go towards paying down your mortgage debt and gradually building equity, an important component of financial security.
Ages 40-65 Once you reach age 40, your financial plan has likely changed significantly since you started your career. At this
point, you should know how to operate on a budget and make an effort to update it annually as your financial situation and goals change. Additionally, you should be saving for retirement every month without fail. Along with sav-
ing for retirement, you should keep evaluating whether or not you are on track for reaching your retirement savings goals and adjust your savings accordingly. Lastly, we encourage you to own a home by now if it fits within your
financial plan and budget. If you have not already bought a home, it is smart to keep saving to do so in the future. Also, make sure to share your financial plan with your family members, especially your kids, so they understand your situation and your wishes if something were to happen to you.
Upon reaching this age group, there is a strong chance that your family will grow if you choose to get married
and have kids. Even though your income should increase as you are further along in your career and your spouse
82 | Five Buckets, Four Shovels, a Beach and a Map
might be generating income as well, having children will cause your living expenses to rise significantly. Child
rearing is yet another reason that you should alter your budget on a regular basis to make sure that your financial
plan is on track. Also, if you want to help pay for your children's college education, you should consider saving on a monthly basis into a 529 plan. By starting early and contributing every month, the investment will have time to grow and can help pay a big part of your kids’ college tuition.
This is also a time period where it will be even more key that you have advisors that you trust, especially in regard to life insurance and estate planning. As your family and responsibility grows, it would be smart to consider pur-
chasing life insurance. If you were to pass away unexpectedly, you would not want to leave your spouse and children without any replacement for your income to take care of expenses. Even if you didn't have a family, it would be nice if you had a life insurance policy in place to cover your funeral expenses and settle all of your debts. Fur-
thermore, if you were to decide to buy a variable universal life policy and lived until retirement, you can draw from the cash value to cover living expenses during retirement or help your kids buy a house. It is important to know that your family is protected.
One last piece of advice for this time period is to work with an estate attorney to develop an estate plan. As your
family grows, it is important to set up wills for you and your spouse so your family members know how you would like your affairs to be settled once you're gone. In addition, setting up a trust to hold your assets would be a great way to avoid the probate process and protect your assets.
Ages 65+ Upon reaching age 60, chances are that you are either retired or planning to retire within the next few years. If you
Five Buckets, Four Shovels, a Beach and a Map | 83
started saving at a young age for retirement then you should be able to enjoy retired life without worrying too much about covering your expenses. However, you still need to pay attention to your budgeting and update your financial plan regularly since your income will be reduced and you will be living off of your savings. Also, to increase
your monthly income, it is smart to delay taking social security until age 70, if possible. By not taking social secu-
rity at age 65, your monthly benefit increases every year until you reach age 70. Therefore, if you don't need social security income to cover your expenses early on in retirement, it is smart to delay your benefit.
Also, as you stop working and your goals change, make sure to update your estate plan accordingly. If you want
your assets to be handled in a certain manner once you die, you need to specify what should be done. Also, if you have a high net worth and your spouse is subject to estate tax, it would be smart to have an irrevocable life insurance trust (ILIT) in place to cover any estate tax that might be assessed once you are gone. Make sure that both your estate plan and financial plan are well-documented so your heirs know what to do if something happens to you.
Finally, one of the most important lessons to folks at this stage of life is to enjoy the fruits of your labor. You worked
hard your whole life to provide for yourself and your family. Yes, it is smart to be frugal and live according to a budget in order to build wealth. It is also very nice to leave money to your heirs once you are gone. However, the truth is that you can't take all of your money with you and that you shouldn't try to leave every last cent behind. This is why we
encourage you to make sure that you do use a portion of your money to enjoy yourself while you can still do so. Also, if you have the means to, we encourage you to give a portion of your wealth to charity and encourage your heirs to create a legacy of charitable giving. This is important to do throughout your lifetime, but we especially encourage charitable giving as you get older as it is the right thing to do.
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~ What’s Next ~ Things You Should Consider at Every Stage of Your Life and Career •
Make sure you do an annual update
denly. Make sure assets are in trusts
parts of the plan it can be updated
Writing down your wishes that go with
of the plan to some degree. For some
and things are properly documented.
every five years. •
If you use credit cards, pay off the balance every month with an automatic
the estate plan is a good idea. •
payment. •
Work off a budget of your expected
inflows of money and how it is spent.
tion, a second home, a big vacation •
•
•
•
Have an estate plan ready on what
happens to your assets if you and/or
your significant other should die sud-
•
Share your plan with your family (espe-
•
Think about charity and some sort
Save for retirement every month with-
•
Don’t live your plan for your heirs, and
out fail. If possible, use the Roth feature Protect your family with well-thought
cially your kids) at the appropriate age. of legacy of giving.
don’t live your life in such a frugal way
that you don’t enjoy the benefits of your efforts.
out life insurance policies. Depending
on your circumstances, consider both
goals, like three years, as well as a tirement.
equity and in the long run it is cheaper
of retirement.
The budget should have short-term long term focus on your needs for re-
If possible, own your home. You build
received.
than renting.
The budget should include savings for specific goals such as college educa-
cost is minor compared to the benefits
term and permanent insurance. •
Use your advisors. No one fills their own cavities or cuts their own hair.
Your advisors are there to guide you.
Assuming you have the right advisors
and your plan is well-coordinated, the
Five Buckets, Four Shovels, a Beach and a Map | 85
~ What’s In Your Buckets ~ Now that we’ve walked you through the methodology, let’s try putting it into action by writing down a few things about your own life including your own buckets, your relationships and advisors.
______________________________ ______________________________ ______________________________ ______________________________
______________________________ ______________________________ ______________________________ ______________________________
______________________________ ______________________________ ______________________________ ______________________________
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______________________________ ______________________________ ______________________________ ______________________________
______________________________ ______________________________ ______________________________ ______________________________
~ Who Are Your Shovel Advisors ~ ______________________________ ______________________________ ______________________________ ______________________________
______________________________ ______________________________ ______________________________
______________________________ ______________________________
______________________________ ______________________________ ______________________________
______________________________ ______________________________
Others:
______________________________
______________________________
______________________________________________________________________________ ______________________________________________________________________________
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Building Your Total Client Profile Who are your most important relationships? Think about your family, friends and organizations you belong to. ______________________________________________________________________________________________________ ______________________________________________________________________________________________________
We talked earlier about the four shovels—CPA, Retirement, Insurance and Investment advisors. We also leave room at the table for other advisors that you might use, like a realtor or attorney. Who are your advisors?
______________________________________________________________________________________________________ ______________________________________________________________________________________________________
How will you communicate your financial plan to those important to you and to your advisors? ______________________________________________________________________________________________________ ______________________________________________________________________________________________________
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Financial goals might change over time, like they did with Steve and Patty. Earlier in life you might be planning to
buy a house, saving for a child’s college education or putting some money away for retirement. Later in life, travel, retirement and charitable giving might take the front seat. What are your financial goals?
______________________________________________________________________________________________________ ______________________________________________________________________________________________________
What are your interests? Maybe you like to volunteer, or want to do some travelling. Putting money aside to fund the fun things in life should be part of your total financial plan.
______________________________________________________________________________________________________ ______________________________________________________________________________________________________
Values play a big part in creating a financial plan that will work for your lifetime. For some it’s their family and friends, for others it’s their church and volunteering their time. What are your values?
______________________________________________________________________________________________________ ______________________________________________________________________________________________________
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Five Buckets, Four Shovels, a Beach and a Map | 93
About the Artist: Richard Sigberman
About the Author: Stephen D. Mayer
Born in New York City in 1952, Richard
Stephen D. Mayer was born in San Fran-
began drawing at an early age and it was
cisco in 1954, where he attended Riordan
obvious that he loved to draw. Rich be-
High School and then U.C. Berkeley.
came serious about fine art and illustration
He is a CPA by trade, however, his en-
in college, however, is mostly self-taught.
trepreneurial nature has lead him to be
He also studied at the NYC Art Students
involved in starting over 18 different busi-
League for 18 months.
nesses.
Rich was a newspaper illustrator for the Palo Alto Times Tribune from 1983-87, responsible for coming up with images for the business section. Since then, Richard has been a free-lance illustrator and fine artist, having created many posters, jazz-oriented art, personal celebration pieces and, most recently, a 25-page sequential art story based on a Nigerian legend. Rich feels that the work he did for Steve Mayer was exemplary in that it combined Steve’s ideas and good writing, with his ability to distill that into images that both illuminate and attract the reader, and makes the copy more inviting. He told Steve early on, “I feel I was born to do this kind of art”.
94 | Five Buckets, Four Shovels, a Beach and a Map
He lives in San Mateo with his wife, Patty, of over 25 years and has three children—Dylan, and twins, Kenzie and Nicola. He is a man of many traditions, including over 40 consecutive years of backpacking with his group of friends. For fun, when he turned 60, he completed an Ironman “because it seemed like a worthy goal”. Steve also enjoys writing, especially when his experiences can help someone else. This book is meant to take a complicated subject and make it easily digestible through simple images and words.
5 Buckets, 4 shovels, a beach and a map With over 40 years of industry experience, Steve Mayer takes the complicated subject of financial planning and explains it in an easy to read format that all ages and levels of income can relate to. Using metaphors for your asset groups (the buckets), your advisors (the shovels), your life (the beach) and your financial plan (the map), Steve walks you through the process of planning and the things you should be thinking about in order to achieve your financial goals, not just for your retirement, but to meet you and your families goals in life. As illustrated in the book, Steve uses his personal story to describe using 5 Buckets, 4 Shovels, a Beach and a Map as his own financial planning strategy. As his assets and family grew, filling the right buckets and having the right shovels in place became increasingly important. In the book, Steve explains how even buying life insurance for his children at a young age helped bridge the gaps and became a planning tool for future, unforeseen expenses. 5 Buckets, 4 Shovels, a Beach and a Map will easily become your go-to reference book for financial planning. Many of SD Mayer & Associates clients have used this approach to successfully create a financial plan that considers their investment, insurance, retirement and other assets so that they are protected now and into the future.
