Does Your Retirement Portfolio Resemble a Junk Drawer? Here's How to Clean It Up, From a Wealth Manager
This retirement planning approach simplifies your decisions, improves your tax efficiency and provides you with peace of mind. This is how it works.
Some clients have portfolios that look a lot like junk drawers. They have a jumble of accounts with no clear strategy for generating retirement income.
Many retirees share that feeling of confusion.
A strategy called "basket planning" can solve this problem.
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Instead of treating your savings as one big pot or a dozen scattered ones, you split them into three baskets, each with a specific purpose and time horizon.
Every dollar gets a job. You know what money to use now and what to save for later. This basket-planning approach simplifies decisions, improves tax efficiency and provides peace of mind.
The three baskets of retirement
The first basket is the security basket, the money you expect to use in the near term, typically the next year or so. It usually holds about a year's worth of living expenses in safe, liquid investments, such as cash or short-term bonds.
The purpose here is peace of mind. When markets are volatile, you're not forced to sell stocks at a bad time just to pay bills.
Next is the income basket, the money meant to support you over the following few years. It's invested in assets that generate income, such as bonds or dividend-paying stocks.
The income from this basket steadily refills the security basket as you spend it, so your near-term cash needs are always covered.
You're essentially planning ahead rather than reacting year by year.
The last basket is the growth basket, money you don't expect to touch for five years or more. It's typically invested in growth-oriented assets such as stocks and stock funds. Its role is to keep pace with inflation, fund later-stage retirement needs and support legacy goals.
Because your short- and mid-term income is already accounted for, this portion of the portfolio can stay invested through market ups and downs without disrupting your lifestyle.
Pairing baskets with the right accounts
Basket planning becomes even more powerful when you pair it with what I call tax layering. The idea is simple: Not all accounts are taxed the same way, so it makes sense to match each basket with the account type that gives it the biggest advantage.
For many families, the security and income baskets work well in tax-deferred accounts such as traditional IRAs or 401(k)s. The interest and the income that those investments generate aren't taxed right away, which helps smooth cash flow.
Just as important is keeping more conservative investments in these accounts, which can prevent them from growing too quickly and creating large required minimum distributions (RMDs) later in retirement.
Conversely, the growth basket is often a great fit for tax-free accounts such as Roth IRAs or Roth 401(k)s. Since those assets can grow and eventually be withdrawn without taxes, you want your long-term, growth-oriented investments working there.
That's especially valuable if part of your goal is to leave money for your family.
When you take the time to put the right investments in the right accounts, you're not just organizing your portfolio; you're reducing unnecessary taxes while still funding each stage of retirement. Over time, that kind of thoughtful asset placement can easily add up to meaningful savings and a more efficient plan overall.
From chaos to clarity
Many retired couples I've worked with have the right idea but the wrong setup. They put their (tax-free) Roth IRA in ultra-conservative investments as their security basket and their (tax-deferred) traditional IRA in aggressive stocks for their growth basket.
They figure that using the Roth for tax-free income now and letting the traditional IRA grow makes sense, but this can backfire.
The Roth might stagnate while the traditional IRA balloons. When retirees are in their early 70s, the RMDs from that oversized IRA will have pushed them into a higher tax bracket.
When I encounter such situations, I reorganize their holdings by moving growth investments into the Roth IRA and safer income assets into the traditional IRA.
This simple swap slashes their future RMDs (and taxes) and allows the Roth to grow unhindered for later use or for use by their heirs.
Their withdrawal plan becomes clear: They take their monthly income from the IRA's conservative basket now, while the Roth is left to grow for long-term needs and legacy goals.
The end result is a simpler, more tax-efficient portfolio, with far less stress.
Key takeaways for your retirement
The goal is to make your income predictable and your decisions calmer. That starts with protecting your short-term needs.
Keeping about a year's worth of expenses in cash or similar safe investments means you're never forced to sell stocks just because the market happens to be down.
It also helps to be intentional about where different types of investments live:
- Higher-growth assets tend to work best in Roth accounts, where the upside can compound tax-free.
- More stable, income-oriented investments often belong in traditional IRAs, where slower growth can help keep future required minimum distributions from becoming unnecessarily large.
Finally, let your plan refill itself. Interest and dividends from your midterm investments can be used to replenish your short-term cash, so income flows steadily without constant second-guessing.
When basket planning is combined with thoughtful tax placement, the result is a retirement strategy that feels simpler, produces more consistent income, prevents unpleasant tax surprises and gives you greater peace of mind along the way.
Ezra Byer contributed to this article.
The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
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