Retirement is a time for freedom and enjoyment, but it also brings one of the biggest financial dilemmas: Should you prioritize spending and making the most of your retirement, or should you focus on leaving a legacy for your loved ones? Many retirees struggle to find the right balance between these two priorities. Fortunately, there’s a strategic way to approach this: the 3-Fund Retirement Strategy. This guide will walk you through a structured process to help you create a sustainable income plan while ensuring you leave the financial legacy you desire.

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Before making any financial decisions, it’s important to define your ultimate retirement goal. Ask yourself:

• Do you want to spend down most of your assets during your lifetime, prioritizing experiences?
• Do you want to preserve a portion of your wealth to pass on to heirs or charities?

Your choice will guide the rest of your financial strategy, influencing how you allocate assets and manage withdrawals throughout retirement.

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A successful retirement plan starts with a clear understanding of your financial needs. You should categorize your expenses into two main groups:

Essential Expenses

These are the non-negotiable costs you must cover to maintain a comfortable lifestyle:

• Housing (mortgage, rent, property taxes, maintenance)
• Food and groceries
• Healthcare and insurance premiums
• Utilities and transportation

Discretionary Expenses

These are flexible expenses that enhance your lifestyle but can be adjusted if needed:

• Travel and vacations
• Dining out and entertainment
• Gifts and charitable contributions
• Hobbies and personal interests

By breaking down your expenses, you can create a more structured financial plan and ensure your income supports your lifestyle in a sustainable way.

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Risk plays a crucial role in your investment decisions. There are two key factors to consider:

• Risk Tolerance: Your emotional ability to handle market fluctuations.
• Risk Capacity: The actual financial ability to take risks based on your income and assets.

For example, if your essential expenses are covered by guaranteed income sources like Social Security or a pension, you might have the capacity to take on more investment risk. However, if you’re relying on investments for your income, you may want a more conservative strategy.

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Once you’ve established your goals and risk profile, it’s time to structure your retirement portfolio. This is where the 3-Fund Retirement Strategy comes in. Each of these funds is based on investment time horizons and asset allocation:

1. Freedom Fund (Short-Term)

• Designed for short-term financial stability.
• Includes cash, money market accounts, and short-term bonds.
• Goal: Preserve capital for 2-3 years of near-term withdrawals.

2. Bridge Fund (Mid-Term)

• Designed to sustain mid-term needs.
• Includes a balanced mix of intermediate-term bonds and stocks.
• Goal: Provide moderate growth with stability for 3-10 years.

3. Legacy Fund (Long-Term)

• Designed for long-term growth and wealth transfer.
• Invested in equities, real estate, and higher-growth assets.
• Goal: Maximize returns for long-term financial security and legacy planning.

This strategy ensures you have the right funds available at the right time while balancing risk and reward across your retirement horizon.

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Beyond asset allocation, it’s important to determine where your assets should be located across different types of accounts to optimize tax efficiency.

Asset Location Strategy

• Taxable Accounts: Best for stocks, municipal bonds, and tax-efficient ETFs.
• Tax-Deferred Accounts (401(k), Traditional IRA): Hold bonds and income-producing assets to defer taxes until withdrawals.
• Tax-Free Accounts (Roth IRA): Ideal for high-growth investments like equities to maximize tax-free growth.

Tax-Efficient Withdrawal Order

How you withdraw money in retirement is just as important as how you invest it. To minimize taxes and ensure longevity, consider the following withdrawal sequence:

1. Taxable Accounts First: These accounts have the lowest tax impact when selling assets.
2. Tax-Deferred Accounts Next: Withdraw from traditional IRAs and 401(k)s strategically to manage Required Minimum Distributions (RMDs).
3. Tax-Free Accounts Last: Leave Roth IRAs to grow tax-free for as long as possible.

By sequencing withdrawals in a tax-efficient way, you can extend the life of your portfolio and reduce unnecessary tax burdens.

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A well-structured retirement plan requires ongoing monitoring and adjustments to stay on track. Each year, review your:

• Spending vs. Projections: Are you withdrawing at a sustainable rate?
• Investment Performance: Does your portfolio still match your risk tolerance?
• Tax Considerations: Are there opportunities for Roth conversions or tax loss harvesting?
• Estate Plan: Ensure your wills, trusts, and beneficiaries align with your legacy goals.

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Balancing spending and legacy in retirement doesn’t have to be an either/or decision. By using the 3-Fund Retirement Strategy, you can create a structured plan that allows you to enjoy your wealth today while securing your financial legacy for the future.

If you’re ready to take control of your retirement income, start by defining your expenses, assessing your risk tolerance, and structuring your assets wisely. By staying proactive and adaptable, you can build a retirement plan that supports both your lifestyle and your long-term goals.