A common question we get is about retirement, specifically how and when one can retire early. If you’re already enjoying your retirement, consider sharing this chat with your kids or grandkids—it might just give them a head start on their plans!

Today, I want to discuss a strategy that many find useful for planning early retirement: the three bucket strategy. This approach is all about how your money is taxed and how you can manage these taxes to your advantage.

First Bucket: The Tax-Deferred Bucket This includes vehicles like your traditional IRAs, 401ks, and 403bs. Here’s the deal: you contribute pre-tax income, which means you get a tax deduction when you put money in. Your money grows tax-deferred—hence the name—which means you won’t pay taxes until you withdraw it, at which point you're taxed on the entire amount you pull out.

Second Bucket: The Tax-Free Bucket In this bucket, your money goes in after you’ve paid taxes on it. Good news, though: it grows tax-free, and you withdraw it tax-free. Sounds perfect, right? Well, because it’s such a sweet deal, the government has put quite a few restrictions on these accounts, like income limits, contribution caps, and rules about when you can start withdrawing without penalties.

Third Bucket: The Taxable Account This is your regular brokerage account, and it’s pretty flexible. There are no caps on how much you can contribute, and you can withdraw at any time. The catch? You pay taxes on the gains based on current capital gains tax rates, whether they're long-term or short-term.

So, why does this matter for early retirement? If you plan to retire before age 59 and a half, the taxable account in the third bucket can be crucial. It offers the liquidity and access you need without the penalties associated with early withdrawals from retirement accounts.

Determining how much to allocate in each bucket can be tricky since personal finance is deeply personal. We can’t give you a one-size-fits-all answer here, but we’re more than happy to discuss your specific situation and help you map out a strategy.

Feel free to reach out if you want to go deeper into how these buckets can work for you, and remember, planning early can make a significant difference in how you enjoy your retirement years. Until next time, take care!