Mental accounting: Engaging clients with bucket planning

Episode 108: Jason Smith joins the podcast to discuss his mission to simplify the planning process and strengthen financial literacy around the globe, including details from his book The Bucket Plan.
August 2020

Jason L Smith

CEO and Founder, C2P Enterprises


Mental accounting: Engaging clients with bucket planning

A big part of a financial advisor’s work is to help clients budget their money towards different objectives and time horizons. Bucketing is a concept you may be familiar with, which can enable people to understand where their money is today, and where they want it to be in the future. The behavioral concept that provides the foundation for bucketing is known as mental accounting.

Jason Smith joins the podcast to discuss his mission to simplify the planning process and strengthen financial literacy around the globe, including details from his book The Bucket Plan

In this episode:

  • Jason’s massive transformative purpose: Simplifying the financial planning process for a billion people worldwide
  • Six actionable steps to help clients develop a personal bucket plan
  • What is the difference between mental accounting and a target date fund?

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Mental accounting: Engaging clients with bucket planning - BCBO ep. 108 - Full audiogram


Jason Smith – This is a very confusing complicated complex topic, comprehensive financial planning, or what we call holistic planning. And no decision is a decision, and what happens too often is advisors don’t have the ability to simplify for the client, the client gets overwhelmed, and ultimately they don’t make a decision.  

Ben Jones – Welcome to Better Conversations. Better Outcomespresented by BMO Global Asset Management. I’m Ben Jones.  
Emily Larsen – And I’m Emily Larsen.  On this show we explore the world of wealth advising from every angle, providing actionable ideas designed to improve outcomes for advisors and their clients.   

Disclosure – The views expressed here are those of the participants and not those of BMO Global Asset Management, its affiliates, or subsidiaries.   

Emily Larsen – On today’s episode, we’re going to dive a little deeper into a topic first discussed on Episode 104: Retirement income planning. Money may be fungible, but a big part of your work is helping your client’s budget their money towards different objectives and time horizons. Bucketing is a concept you may be familiar with, which can enable people to understand where their money is today, and where they want it to be in the future. The behavioral concept that provides the foundation for bucketing is known as mental accounting. Jason Smith is on a mission to simplify the planning process and strengthen financial literacy around the global. To aid that mission, he literally wrote the book on today’s topic –The Bucket Plan.  

Ben Jones – As the CEO and founder of C2P Enterprises, Jason is committed to helping all people frame their economic decisions in a healthy way. Jason has always had a strong work ethic, but years ago he had a transformative experience that changed the way he approaches life and business.   

Jason Smith – I was 29 years old, so imagine if this were you, you’re 29 years old, things are going really well, I had a store front and a part-time assistant that helped with paperwork. I had a beautiful wife and young daughter. She’s my fifth, my oldest one, and you know I came home one night and I looked down at my chest and my heart was jumping out and skipping beats, and something was wrong. So long story short, I get whisked away and I’m being diagnosed with a heart condition that’s going to require life threatening open heart surgery. And all of a sudden, I realize that if I were to die on an operating table, my income dies with me, for my wife and for my daughter, because at that point I really didn’t have a business, I was just a really good planner and salesperson. But ultimately, I didn’t have a business that had a lot of reoccurring revenue that would continue on with or without me. And to boot, being the shoemaker’s kid, the son of an insurance guy, I had no life insurance. And so, it was just hitting me like a ton of bricks, that if I did die on that operating table, my income dies with me. And my wife and daughter are not in good shape, so at that point at 29 I set out to build my practice, The JL Smith Group, into a business that would run successfully with or without me. Really, a self-managing company, as a coach of mine, Dan Sullivan, says. So that’s what I set out to do and if you fast forward three years ago, I had to have that surgery, and it actually required five months off. And after five months of no meetings, no phone calls, no texts, no e-mails, no anything, I reentered my businesses and I looked at my practice, The JL Smith Group, and we had the second most profitable quarter we had ever had without me. Yeah, I had mixed feelings about that, on one hand there was proof of concept I was able to successfully build that company that will run with or without me. But then secondarily, if I — oh you don’t need me anymore, right? That was really the journey that took me to what’s been built today, and then how we support other advisors and with processes and systems and coaching and mentoring to do the same.   

Ben Jones – That’s a really powerful story, and it sounds like it brought a real growth opportunity for you and your business and your life. So, thanks for sharing that. Now, I mentioned at the top of the show, that you are a man on a mission and you have kind of I think you refer to it as an MTP, a massive transformative purpose. What is it?   

Jason Smith – Yeah, yes, so I was inspired — I was blessed and lucky enough to get invited to a group many years ago that’s basically a CEO group called the Abundance 360. Peter Diamandis put this together. It’s across all different industries, but it was humbling because there were four billionaires in the room, and I definitely was not one of those. But I was in there and it was pretty overwhelming. One of the people in the room was the co-founder of Google, and so he got up and he started talking about Google’s massive transformative purpose, and how all of the most successful companies have these. And I had never heard of this concept before, but it really hit home with me. So Google gave the example of what their MTP is, and it’s to organize the world’s information. And so that’s a handful of words that quite simply states how your company is going to make the world a better place, organize the world’s information, and I’m like: Hmm, what is my MTP? What is my company’s MTP? How am I going to make a world the better place? And this is probably about eight years ago. And it hit me that to simplify the financial planning process for a billion people worldwide, and I just lit up. I immediately went back to my business partners and I told them like, this is our MTP. This is why I’m on this Earth and this is the difference I want to make. And it’s one of the things that inspired me to write The Bucket Plan book and just continue to educate as many advisors and in as many venues as we can to get the message out and really give a lot of the IP away of helping the advisors simplify for their clients. Because, at the end of the day, I think what happens is this is a very confusing, complicated, complex topic: Comprehensive financial planning, or what we call holistic planning. And, no decision is a decision. And what happens too often is advisors don’t have the ability to simplify it for the client, the client gets overwhelmed, and ultimately they don’t make a decision. And then that hurts everybody. That hurts the client. It hurts the advisor. Nobody wins from that. And so at the end of the day what we’re trying to do is we’re helping advisors simplify it for their clients, so they do make decisions. Simplifying the financial planning process for a billion people worldwide, that’s our MTP.   

Emily Larsen – Wow, you heard that correctly. Jason said his massive transformative purpose is to simplify financial planning for a billion people worldwide. That’s one, followed by nine zeros. We hear a lot about the value of thinking big. Well, here, you see it in action, and Jason is confident that he and his team can reach this goal over the course of his career. They’re making this happen. And his book, The Bucket Plan, has given him the platform. It’s being translated into many languages and even made accessible to children with a book they can relate to. So now, let’s talk about, what is a bucket plan? Jason has identified six actionable steps to helping clients develop their own personal bucket plan.   

Jason Smith – When we’re breaking these six steps, what you’re going to see in this book is really the first two is talking about the money cycle and the bucket plan philosophy. The first thing that I do is I explain the money cycle. And the money cycle is a simply concept we all go through throughout our lifetime and it’s got three phases: Accumulation, preservation, and distribution. Now, the accumulation phase is when we’re younger, we’re working, we’re preparing for retirement, we have a long time horizon before we’re going to need to access those funds, so we can afford to take on more risk, we can afford to take on more volatility. Because if we lose the money, we’re working, and we can make that money back. If the market crashes, we’ve got plenty of time to wait for it to come back. That’s the accumulation phase. Now, the second of the three phases is the preservation phase. The preservation phase is where we want to preserve a portion of the assets in preparation for the third and final phase, distribution – distribution to ourselves in retirement and distributions for our family upon our passing. Now, the biggest mistake that we see people make is they go directly from accumulation into distribution, and they never preserve a portion of the assets that they’re going to draw from throughout that first phase of retirement. So, how do we mitigate this risk? How do we avoid this mistake? We subscribe to a simple three bucket approach: Now, soon, and later. The now bucket is our safe and liquid money. That’s where money that we can put our head on the pillow at night and sleep soundly when we know it’s there. It’s our emergency or comfort fund. It’s our planned expenses over the next couple of years. And if we’re about to retire or already retired, we want to put 12 months of income into the now bucket, so there’s three components. That’s the now bucket. That is our safe and liquid money. We need to make sure we get that number right. Too many advisors make the mistake of trying to drain that bucket dry to get it all invested. So that’s our now bucket, and then from there, it’s a simple two bucket approach, soon and later. The soon bucket is that preservation bucket, it’s that money that we may need, will need, or will be forced to take out because of RMDs sooner rather than later. We have to take a more conservative approach with that money, so we have the confidence and the capability to take heavy withdrawals in that first phase of retirement, or when or if we need those distributions, that income or withdrawals. So that soon bucket buys us a time horizon to give us the confidence to invest the rest of the money in a later bucket. And so the rest of the money in the later bucket is our long-term growth and legacy planning, and so when I say legacy planning, you might say hey Jason my kids are raised whatever is left is left, how many of you have heard that from your clients? But, see, legacy planning is not just for the kids, it’s most importantly for the surviving spouse. Because when one spouse passes away what happens to income almost all the time? It goes down, if there’s two Social Security checks, there may be a pension check involved, there might be some part-time work income. Income almost always goes down when one spouse passes away, but what happens to the income taxes? They go up, because the standard deduction gets cut in half, all of the brackets shrink, you go from married filing jointly to a widower, a single filer, and your income tax liability goes up substantially. It’s a double whammy, and we have to plan for that.   

Ben Jones – When exactly should someone enter this preservation phase that you talked about in the money cycle? Because, I think you’re right, people think about accumulation and then de-accumulation, and this middle phase of preservation is certainly an often skipped step. So, when do you see people needing to step into preservation, and how do you do that? Do you ease in over time, or tell me a little bit about how that works.   

Jason Smith – What we advise is 10 years out from retirement, you need to start looking at starting to segment that money into the proper buckets. Because, most consumers and clients out there, and general population understand, that if you have a 10 year time horizon, you’re in pretty good shape to be able to take on the volatility in the market. But when you start shrinking that time horizon, when you start getting into what we call the red zone, where you’re within 10 years from retirement, now you need to start preserving a portion of the assets that you’re going to draw from in that first phase of retirement. You really need to make sure that you’re intentional about setting up that soon bucket 

Ben Jones – And that’s really more about managing sequential risk in kind of the five years prior to retirement and the five years after, correct?   

Jason Smith – Yeah, that’s a huge part of it. We just start really having those conversations, because if you get a more conservative client, and you wait until five years before, they’re not comfortable. They’re on pins and needles. So we start having those conversations about setting up a soon bucket when they’re 10 years out from retirement, and they’re already more conservative clients. You just want to note, they don’t have pensions, and they want that piece of mind that a portion of their money might go into an asset or an investment vehicle that’s going to give them that stability of income in that soon bucket.   

Ben Jones – One of the things I like most about the way that Jason lays out the money cycle in his Introduction To Bucketing, is its use of commercial teaching. You inform the client about a problem which they may not know that they have, skipping the preservation phase. Then, you show them a solution to this problem, which is the time segmentation of their assets, a bucket plan. This is a way that your clients can better understand and know exactly why they are using this method of mental accounting. The remaining steps are all about developing the plan that works for your clients’ specific financial objectives.  

Jason Smith – Steps three, four and five, what we’re really doing is just gathering the data that’s necessary to deliver a financial plan in step six, a customized bucket plan. So three, four and five is all about identifying the income gap, how much are they going to need to draw off liquid investable assets, and then it’s about documenting everything they have in an asset sheet questionnaire, right, doing a thorough inventory, and compartmentalizing it into pre-tax, post-tax and tax-free money, so you’re positioning the money correctly when you go to design the bucket plan. And helping them think through things, like Roth conversion or putting life insurance in place. So, the last tool is the volatility tolerance analysis. The whole thing about that is, and what perplexes me, is anybody who’s doing bucketing, I cannot wrap my mind around, because I tried to do it for years before we developed the volatility tolerance analysis, how you can use any type of risk assessment that doesn’t score the buckets separately. It completely contradicts the entire philosophy of bucketing. You have to score the buckets separately. Because it’s a different time horizon and purpose of the money it absolutely makes no sense to invest your short-term money that you’re going to be drawing happily off of the same as your long-term money that you’re absolutely not going to touch for at least 10 years. And so the volatility tolerance analysis scores those buckets separately. But as I mentioned before, three, four and five, those three tools, are all about gathering the data to prepare you for the final step, which is designing and delivering a customized bucket plan to your client, and there’s a bucket plan design worksheet that we’ve created that step by step walks you through taking all of that data you’ve gathered through the previous five steps and then designing a customized bucket plan for your client.   

Ben Jones – Now, I love the six steps, and part of the thing that I love about steps three, four and five, so the asset sheet, the income gap assessment, and the volatility tolerance is that these are tools that advisors have used for a long time. But one of the things that you’ve done is you’ve really simplified it in a way that brings the client along in the journey. In other words, they finally understand for example, people have taken risk tolerance questionnaires forever, and it might end up in an allocation, but when you go through and you score those risk tolerances separately, it brings the clients along with tying the investment vehicles and the investment types to the right mental accounting of their money and scoring those appropriately. And I think there’s a really clever way to frame and simplify the planning process so it brings the client along with you rather than you being the kind of all-knowing guru.   

Jason Smith – And also, Ben, what we do as a best practice, and I’d encourage all of you to do it, we do not use financial planning software as an automatic every time. Just financial modeling can take anywhere from two to six hours, and so it’s very time consuming, and too many advisors make the mistake of thinking the bigger the 85 page report, the louder thump that it makes when it hits the desk, the better the financial plan. And that’s just not the case, in many cases that just confuses the heck out of the clients, and it creates a lot of complexity and additional work that you didn’t need to do. And so in some cases you absolutely need to do it. Right? Goals-based planning, longer time horizon before you need to access the money, planning for inflation and contributions to retirement accounts, the growth factors, and all of that. But as you’re getting closer in many cases, you just don’t need to do all of that financial modeling. So what we do, Ben, is we take those tools that we just talked about, and we package them into a really nice deliverable that we give to the client along with their customized bucket plan. Then, any illustrations, or proposals, or sheets outlining the investments, et cetera, what we try and strive to keep it as simple as we can, for the client to go back and be able to look through, remember the process you  took them through, and understand what they’re actually reading and looking at.   

Ben Jones – When is it right to do all of that financial modeling, and is it driven by the client’s complexity, or when is it right? When is it not right?  

Jason Smith – There are situations where you absolutely, in my opinion, have to be doing financial modeling, you have to be doing tax modeling, you have to be doing Social Security optimization. All of those things are very, very important. You just have to pick and choose your battles and when it’s important to bring those tools into the toolbox. You don’t need every tool every time based on the project or the plan that you’re working on. And so, if I’m working with somebody who, for example, is going to be drawing more than 3%, so I use a 3% rule. If they’re going to be drawing more than 3% off their liquid investable assets, I’m going to do financial modeling to show them the probability and the risk of them running out of money. That’s just, for me, I feel that’s a fiduciary responsibility of me to be able to do that. But I use that 3% as a benchmark. The other thing, is when it comes to tax modeling, when we start dealing with clients that have the ability to blend out income, pre-tax, post-tax, and tax-free, meaning they’ve accumulated Roth, I feel like again it’s a fiduciary responsibility for you to be doing tax modeling, whether you do it or you work closely with their tax professional, but you have to take tax considerations into the advice that you’re giving of what they’re going to draw from in retirement. Because you may want to do a blend of different types of assets, in that soon bucket, to keep them for example in a 12% bracket instead of bumping up into the 22% a portion of their income? And so those are a couple of examples, Ben, when we definitely need to be looking to use those type of tools.   

Emily Larsen – In case you missed it, steps three, four and five include: Three: Gathering comprehensive information about your clients’ assets. Four: Determining the income gap between retirement income sources and retirement income needs. And five: Agreeing on a suitable amount of risk that clients are comfortable with in the volatility tolerance analysis.   

Ben Jones – Now, I’m sure you’re already thinking this, but these discovery steps are not new to financial planning. However, the way that these steps are framed to your clients could have a big impact on their understanding and success when it comes to implementing these plans. You include risk management tools in the later bucket, so long-term disability, long-term care, life insurance, et cetera. Why do those fall into the later bucket?   

Jason Smith – Yeah, great question. So, the reason that we put those into the later bucket is just from a mental standpoint, nobody wants to think about that stuff happening now or soon. Right?  But we have to plan for it. Just in case it happens later, we have to know, but for example, Ben, let’s say that we have a life insurance policy that’s positioned in the later bucket, and primarily we’re positioning it for the death benefit. But it’s a permanent policy that we’re accumulating cash value. Well, later in life, the need for the insurance might dissipate as mortgages are paid off, or they’re getting closer to the life insurance not being needed to replace income. We might reposition that asset into the soon bucket to be able to draw from for a tax efficient way to draw income in retirement. But initially we’re positioning it really just to show that it exists and when people think about life insurance and think about a death benefit, they want to know it’s there but they don’t want to think about dying now or soon, right? That’s the great thing about the bucket plan is every year as you’re doing your annual review, and this is an important thing to note, you’re making adjustments, you’re updating account balances, in many cases you’re changing allocation strategies, you’re repositioning assets that used to be a later bucket asset, now they’re becoming a soon bucket asset, and the other way around. So, the flexibility and the importance of you as the planner sitting down with your clients, doing an annual review, and always updating their bucket plan every year. 

Ben Jones – That makes a lot of sense to me. I’m curious Jason, I do have one other question for you that I think a lot of people have when they read The Bucket Plan, which is when you roll up all three of these buckets, it certainly helps the client simplify the process from a mental accounting standpoint, but is it really different from say what they might get with like a target-date fund, where it automatically kind of rolls down as they approach retirement.   

Jason Smith – I think the difference is the confidence that it gives the client of the ability to understand and time segment whether its goals, if they’re younger, and to your point earlier, Ben, where people will have: This is money earmarked for vacation, this is money earmarked for taxes, this is money earmarked for college, this is money earmarked for a down payment on a home. Whatever those different time periods are, or retirement if we go out long-term, or legacy planning. So, I think it’s more about compartmentalizing and setting the goals when you’re talking to somebody a ways out, 10+ years out, and then when you’re talking to somebody who’s nearer in the red zone, or preparing to go into retirement, now it’s avoiding freak out risk. That’s the biggest danger that I see, Ben, is people freak out and make bad decisions. I’m sure over the last few months there’s been a lot of people that didn’t have their money segmented into buckets that freaked out, and their advisors weren’t able to talk them off the ledge, and they made bad decisions of cashing out when the market was down. And so, there’s still cash in the now bucket. If you think of the soon bucket, it’s bonds or fixed income alternative. And if you think of a later bucket, it’s your equities, your alternatives, and then your life insurance to take care of legacy planning. So at the end of the day, if you really look at the bucket plan philosophy, this is all about asset allocation, which is what we’ve done forever. But it’s doing it in a simplified way that your clients will actually understand.   

Emily Larsen – If you can bring your clients along for the ride, they’ll be better equipped to understand their situation and feel secure about their financial goals. We want to thank Jason for sharing his passion on the topic with us today. We will for sure be checking back in with him on his journey to help a billion people with financial literacy. To wrap up, we had a couple of final questions for Jason:   

Ben Jones – What is it feel like to be an advisor that gets this right with clients?  

Jason Smith – I mean, I’ll give an example of the recent volatility that we just experienced, the huge drop in the market, and then the big rebound that we experienced.  We didn’t get calls, right? And so, not only did it avoid freak out risk for our clients to know that they had a now and a soon bucket set up, so they could weather the storm, because they had a long-term outlook on the money that was experiencing volatility in their later bucket, but we avoided freak out risk for our advisors at the JL Smith Group. Because, they didn’t have to have the type of difficult conversations, talking clients off the ledge, like a lot of other advisors have had to do. So that part feels really, really good, Ben.

Ben Jones – And what does it feel like when you’re the client of an advisor with a good bucket plan?   

Jason Smith – I mean I think what it really feels like, and I’ll use as an actual story of a client recently, that when we went through this volatility, gave us a call, so she got together with a group of girlfriends, they had a reading club, and they transitioned it to all being done via Zoom. And she said I was so proud because everybody else was talking about they were worried about the market, this, that and the other. Some of them hadn’t heard from their advisor. None of them had bucket plans. And I was so proud when I was able to talk about my now, soon and later bucket and how I wasn’t worried. So I think pride that they have a bucket plan and they have peace of mind to be able to weather the storm.

Ben Jones – Thank you for listening to Better Conversations. Better Outcomes.  This podcast is presented by BMO Global Asset Management.  To access the resources discussed in today’s show, please visit us at www.bmogam.com/betterconversations.    
Emily Larsen – We love feedback and would love to hear what you thought about today’s episode.  You can send an e-mail to [email protected]   
Ben Jones – And we really respond.   
Emily Larsen – We do.   
Ben Jones – If you thought of someone during today’s episode, we would be flattered if you would take a moment and share this podcast with them.  You can listen and subscribe to our show on Apple Podcasts, or whatever your favorite podcast platform is, and of course, we would greatly appreciate it if you would take a moment to review us on that app.  Our podcasts and resources are supported by a very talented team of dedicated professionals at BMO including Pat Bordak, Derek Devereaux.  The show is edited and produced by Jonah Geil-Neufeld and Sam Peers Nitzberg of Puddle Creative.  These are the real people that make the show happen, so thank you, and until next time, I’m Ben Jones.   
Emily Larsen – And I’m Emily Larsen.  From all of us at BMO Global Asset Management, hoping you have a productive and wonderful week.   
Disclosures – The views expressed here are those of the participants and not those of BMO Global Asset Management, its affiliates, or subsidiaries. This is not intended to serve as a complete analysis of every material fact regarding any company, industry, strategy, or security. This presentation may contain forward looking statements. Investors are cautioned not to place undue reliance on such statements as actual results could vary. This presentation is for general information purposes only, and does not constitute investment, legal or tax advice and is not intended as an endorsement of any specific investment product or service. Individual investors are to consult with an investment, legal, and/or tax professional about their personal situation. Past performance is not indicative of future results.  BMO Global Asset Management is the brand name for various affiliated entities of BMO Financial Group that provide investment management, trust, and custody services. BMO Financial Group is a service mark of Bank of Montreal.  Further information can be found at www.bmogam.com. 

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