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We all need money management advice, whether you’re an experienced investor or a young adult trying to purchase your first-time home. MassMutual’s team is here to help.
Today’s insights on saving for multiple goals come from Daniel J. Drabinski, founder and chief executive officer of Integrated Strategies in Dallas, Texas.
Q: What advice can you give to those who are trying to save for retirement as well as short-term financial goals?
A: When we plan for a client’s financial goals, we tend to think about savings targets in terms of buckets, and my team likes to use what we call the Waterfall Funding Strategy. Each bucket has a separate function, and thus an intentional funding strategy.
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The retirement bucket
For example, qualified retirement accounts, such as traditional IRA, 401(k), or 403(b) accounts offer tax deferral. Each dollar you place into these accounts grants you a tax deduction up front. However, the trade-off is that you effectively have a silent partner in the IRS, which will tax future withdrawals at your ordinary income tax rate and you generally may not access the account without triggering an additional tax until you're at least age 59½.
Thus, these accounts can be great if your cash flow is high and you require an immediate tax deduction but have confidence you will not need liquidity in the immediate future. These vehicles could also be well-suited for high-interest investments, such as high-yield bonds, as they may enable you to shield a portion of the income from ordinary income taxes.
Once these buckets are full, we tend to look into tax-advantaged options, such as Roth IRAs, annuities, and permanent life insurance. These accounts are typically funded with after-tax dollars and may offer tax-deferred growth or tax-free withdrawals if certain conditions are met. They can be effective for managing high-growth assets. In the case of permanent life insurance, while its primary purpose is to provide a death benefit, the policy’s cash value may accumulate over time and can be accessed to support liquidity needs during retirement or market downturns.1 Generally, placing your lowest-basis, highest growth assets in tax-deferred accounts can enhance tax efficiency. (Learn more: How life insurance provides 3 distinct tax advantages)
The bucket for short- and medium-term goals
Next, we often explore nonqualified, or cash, buckets, for short-term and medium-term goals. These include brokerage accounts, savings accounts, and emergency funds. And we like to separate these buckets into intentional time frames.
First, we suggest all clients maintain three to six months of living expenses in liquid investments that are generally accessible within 48 hours if needed.2 This may include a combination of money market funds and large capitalization liquid equities that can typically be sold quickly if necessary.
The medium-term bucket, by contrast, is often comprised of value stocks, tax-favored income products, such as municipal bonds, and mutual funds or exchange-traded funds (ETFs).
The bucket for longer-term goals, other than retirement
For the third, longer-term nonqualified bucket, we often evaluate strategies that combine sector rotation with tax planning. This approach may help manage exposure to taxes on any distributions and potentially take advantage of long-term trends in the market.
These buckets are taxable and subject to volatility swings, so one must be careful when reviewing potential investments. I often see investors place their highest volatility bets, such as Magnificent 7 technology stocks or cryptocurrencies, into this bucket. I view this as a mistake from a tax standpoint, as it can create highly taxable events, while introducing additional risk. (Learn more: Should cryptocurrency be in your portfolio)
We also break out a separate bucket for education, or college. This bucket is often comprised of accounts such as 529 plans, UTMAs, or other state-specific vehicles. These accounts provide dedicated funds for tuition and room and board at accredited universities, and, after the passage of Secure Act 2.0, assets in these accounts can now be used for private schooling. Where appropriate, we also look at juvenile life insurance policies which may offer long-term protection and cash value accumulation that can be accessed for various needs, including education. (Related: Custodial accounts and Coverdells: How to use them)
In some cases, permanent life insurance may also be considered as part of a broader financial strategy. While its primary purpose is to provide a death benefit, the cash value can accrue over time. This may offer flexibility to support things like travel, an automobile, and extracurricular activities. (Related: Cash value life insurance loans: Pros and cons)
Lastly, in addition to our bucket approach, we like to incorporate risk protection vehicles, such as term insurance and disability income insurance into the overall financial strategy. These vehicles are designed to provide protection and peace of mind against income loss due to death or disability. Although often overlooked, they play a critical role in maintaining financial stability as we focus on helping clients save toward the other buckets.
Since 1851, MassMutual has been focused on helping people secure their future and protect the ones they love. That purpose is why we have thousands of financial professionals to assist you on your journey through insurance, investing, retirement planning, estate management, and more. You can find a MassMutual professional with this tool or you can let us know you’d like to talk with one and we’ll have one of our financial professionals contact you.
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Frequently Asked Questions about saving for multiple goals
Q: Where should I start when saving for retirement?
A: Financial professional often suggest starting with qualified tax-deferred accounts such as a traditional IRA, 401(k), or 403(b). These vehicles offer an upfront tax deduction, which makes them particularly attractive when your income and cash flow are high and you don't anticipate needing the funds before age 59½. They may also work well for holding high-interest investments like high-yield bonds, since the tax deferral shields that income from ordinary income taxes in the near term. The trade-off is that withdrawals in retirement will be taxed at your ordinary income tax rate.
Q: What happens once my tax-deferred retirement accounts are fully funded?
A: Once the retirement bucket is full, you may wish to shift focus to tax-advantaged options — specifically Roth IRAs, annuities, and permanent life insurance. These products offer a different kind of tax benefit: rather than deferring taxes on the way in, they allow your money to grow in a way that can potentially reduce or eliminate your tax burden on the way out, making them powerful complements to traditional retirement accounts.
Q: How do I balance saving for retirement alongside shorter-term goals like buying a home or funding education?
A: That's precisely where the bucket strategy earns its value. By assigning each financial goal its own dedicated bucket — with an appropriate savings vehicle, time horizon, and funding priority — you avoid the trap of raiding long-term savings to meet short-term needs, or vice versa. A financial professional can help you determine the right sequencing and products for each bucket based on your income, tax situation, and timeline.
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