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Magic pot. Magic pot. Magic pot.

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Bring on the magic!

When I was a child student at Benjamin Franklin Elementary in the 1970s, we enjoyed a periodic visit from a clown named Zeezo. The entire K-6 student body would lug their heavy metal chairs to the gymnasium and be regaled with magic tricks and the civic reminder to “Always Say Please and Thank You.”

With Lucky Charms cereal on the breakfast tabletop (launched in 1964), Zeezo, and the Scholastic Book Club featuring books about card and magic tricks, magic was all around us. That and the constant fear of nuclear holocaust.

Despite the passage of time and a wistful loss of innocence, teachers (and other educators) still can enjoy a bit of magic as part of their financial planning. Really. I’m not kidding. Would you like to hear more?

What does Zeezo teach us to say, boys and girls?

PLEASE!

What’s in your bucket(s)?

I learned about the bucket strategy for investing as I was planning for retirement. It’s nothing new and has been around for a while. You can Google it and find dozens of articles explaining it. While the specific strategies vary a bit, they usually have three investment buckets. In the spirit of Zeezo and the Lucky Charms leprechaun, let’s turn them into ‘pots’ and add a fourth, the magic pot!

• Pot #1: Immediate-short term-secure
• Pot #2: Intermediate-fixed income-stable
• Pot #3: Long term-growth-variable
• Pot #4: The magic pot (ooooh!!!)

Filling these pots by saving and investing regularly and efficiently will help ensure your financial security and independence. While these investments are key to a secure retirement, they are also a sound strategy for more immediate financial stability and confidence. 

Pot #1: Immediate | short term | secure

This pot is most like an emergency fund, but instead of covering 3-6 months of expenses, it’s intended to provide 1-3 years of living expenses.

Before you freak out and say “I’ll never have that much money!”, this pot is for those near or in retirement, not those beginning their education careers. That said, if you are aiming to be financially independent before retirement, building a pot like this is a really good idea. Wanna take a year off with an unpaid leave? If you have this pot funded, you could. 

This pot includes the safest, most secure investments in the form of cash or cash equivalents. And, no, that doesn’t mean a pile of $100 bills in your basement — this cash should be safely ensconced in federally insured (FDIC or NCUA) banks or credit unions. Like an emergency fund, the goal of this pot is not to make money, but to preserve capital — the value of your money.

Post-pandemic, savings accounts at banks and credit unions earned little or no interest due to the historically low rates imposed by the Fed. But recently, those rates have increased significantly. If you can find federally insured savings accounts which earn interest, by all means, let your safe money make a little money. But like an emergency fund, the value of this pot is not the money that you earn from it, but the security that these funds provide. 

I’ve already written about the importance of having an emergency fund and this first bucket is really an extension of that idea — having secure money in the bank which is there when you need it. It should be a few clicks away even if the stock market crashed yesterday or a storm is about to ravage your area. This is the most boring bucket, but is also the bucket that you’ll reach for when a storm hits.

Pot #2: Intermediate | fixed income | stable

The goal of this pot is to make investments or deposits which have rates of return that ideally keep up with the pace of inflation. But while the first pot aims to not lose any money, this one aims for stable and ‘fixed’ growth over time. Because interest rates have risen in the past several years, this pot may include some of the same investments (interest-bearing savings accounts) as the first secure pot. However, this pot could also include investments like 

• Certificates of deposit (CDs) which may earn more than a savings account but lock up your money for a period of time,
• Money market funds (not necessarily FDIC or NCUA insured),
• Current or near-term target date funds which become more conservative (safer) as they approach the target date,
• Bonds and bond funds which are traditionally less volatile than stocks and stock funds, 
• Mutual or retirement funds described as ‘Conservative,’ ‘Dividend,’ or ‘Balanced,’ and/or
• U.S. Treasury securities. 

As part of a retirement strategy, this pot is the tortoise, not the hare, trading rapid or significant growth for some stability and softening the blows of economic or market turbulence. 

Beyond your retirement plan, it makes sense to include both tax-advantaged retirement accounts and taxable ‘brokerage’ or bank accounts in this pot.

Here’s why — your retirement accounts are tax-advantaged and generally only available when you are older or qualify for retirement. If you take the money out early, you will likely pay a penalty or lose value in the investments. Bank or brokerage accounts don’t have these limitations and while you will often pay taxes on earnings, you can access those monies without penalties. If you need a chunk of money to pay for a college degree or a down-payment on a house, these are the resources that can help pay for these expenses. 

Up until recently, investments like CDs, savings, and money market accounts were a safe and logical go-to for retirees and those nearing retirement. However two things happened which made them less attractive:

1. The Fed dropped and sustained historically low interest rates, meaning these types of accounts earned little or nothing. Sure, you didn’t lose any money. But you also didn’t earn any money. AND
2. After years of tepid inflation, 2022 and 2023 brought inflation rates that hadn’t been seen for decades. (Inflation effectively is a drain on savings, making each dollar less valuable.)

This meant that $1000 in a savings account or certificate of deposit didn’t gain any interest (because of the Fed rates) AND it lost spending power as a result of inflation. When you hear the phrase ‘not keeping up with inflation,’ that’s what this phrase means.  

Recent history aside, things are getting better for savers. Because of inflation, among other concerns, the Fed has been steadily raising interest rates since March, 2022. And inflation has been coming down from an annual high 8% in 2022. For savers, this is good news and makes this pot far easier to fill and more attractive as part of a plan for financial independence. 

In future posts, I’ll explore the other investment options above in more detail. With the exception of the U.S. Treasury products, it’s likely that you have access to these types of investments either through your financial institution, your pension, 403(b), or deferred compensation program.

Pot #3: Long term | growth | variable

The goal of this pot is to make you money for your future (not present) financial independence and, eventually, retirement. Investments in this pot prioritize potential greater return in exchange for greater risk. For this reason, this pot likely includes stocks or stock funds and may be defined by fund providers in terms like ‘growth-income,’ ‘growth,’ ‘emerging markets,’ or ‘aggressive.’ This pot could also include index funds which emulate a specific stock market index like the S&P 500, NASDAQ or Dow. 

This pot is most affected by market volatility, either growing nicely when the stock market is up or (possibly quickly) losing value when it’s down. If you look at a five-year historical graph of these investments, they are likely to look like a very jagged mountainside that includes some significant valleys or crevasses. And, you’ll also (hopefully) see how far your investment might have grown.

The screenshot below is a recent five-year snapshot of the S&P 500 Index. Based on this performance, a single $1000 investment in this index in September 2019 would be worth over $1900 in September 2024. Some caveats are in order. First, the last five years are generally viewed as a ‘bull’ market in which this and other indexes have grown steadily in value. Second, there is no guarantee that the next five years will have equivalent performance.

Many adults who are saving for retirement rely on this pot to build their wealth over time, particularly those who are younger. The reason? Despite short-term volatility, investments in stocks have historically outperformed bonds and fixed income investments (like those in Pot #2) with a 7.5% average annualized return over the last 30 years. That said, if any pot is like the ‘hare,’ this is it. Jump up, jump right, jump into a hole….

Leave this money alone

By and large, the money in this pot should be left alone until you are approaching retirement or emerging as a financially independent educator. There are several reasons for this.

First, as mentioned above, you should have these monies invested in tax-advantaged accounts which will be able to grow tax-free or tax-deferred over time. That’s the good news. The bad news is that the IRS attaches strings or charges you penalties for accessing those monies early. 

Second, taking money out of this pot means that the money doesn’t grow in value for your future needs. Let’s say you need $10,000 to pay for a used car for your kid. Taking $10K out of a growth portfolio would be worth $87,500 if you had left it in place for 30 years based on 7.5% annual interest. That’s a lot to pay for a used Hyundai with 75,000 miles on it. That’s also why you should have money in the other pots listed above….

Third, because the behavior and returns of this pot are more variable and volatile, losing your cool and taking money out of this pot when the markets are down (and after they’ve lost value), means you lock in your losses. And trying to time the market by buying low and selling high has been proven time and again to be a fool’s errand. 

To quote Ron Popeil, this is the ‘set it and forget it’pot. Create it, set up regular contributions, periodically make adjustments to where your money is invested, and just let it grow for a few decades. Want a six figure portfolio? Based on historic returns and market performance, this pot will add multiple zeroes to the first $100 that goes in, so long as you keep adding to it over time.

But wait, what’s the fourth pot?

The good news for educators is that if you have a pension, you have what I would consider a fourth magic pot — one which keeps filling itself while you’re working as an educator and then paying you beginning at retirement age for as long as you breathe. When you qualify and begin receiving pension benefits (at a certain age), you receive guaranteed income for life. It’s quite literally a pot of gold (okay, dollars). In many cases, that income is even adjusted for inflation. 

Social Security retirement benefits could also be included in this pot as this program also provides monthly income for your lifetime. While almost everyone has or will (hopefully) qualify for some kind of Social Security benefits, educators are extra lucky because they have the magic of their pension benefits too. 

What does Zeezo the Clown teach us to say?

THANK YOU, TEACHER RETIREMENT SYSTEM!

If you have this magic pot to look forward to, you may have some more flexibility in your planning for financial independence and retirement. Knowing that at a designated retirement age, you will have a steady stream of income, you may be able to fill your pots differently than many non-educators. Here’s why — those without pensions have to thread the needle with their retirement investments. 

On one hand, they need to invest aggressively enough to make enough money to last them through their retirement. On the other hand, they need to manage risk so that the stock market and economy doesn’t kick them in the knees. 

How big should my pots be?

As I shared earlier, the bucket (or pot) strategy is traditionally associated with planning and living in retirement. But I personally think that conceiving personal finance in terms of these categories can also be very helpful. When you are saving and investing, diversifying your investments is always wise:

• Keep some of your hard-earned money high and dry and ready for emergencies or downturns, and
• Put some of your money in steady investments that, ideally, offer guaranteed (if not exciting) returns, and
• Regularly contribute to (and don’t worry too much about) growth investments that will help ensure you can be financially independent one day.

Teachers and other educators with the magic pension pot have it a little easier. Since your magic pot will provide safe and secure income at retirement age, you can choose the tortoise or the hare. And hopefully not spend as much time micromanaging your investments in retirement.

How you fill your pots is more complicated and really lies at the heart of building your personal financial intelligence and independence. Several variables come into play — your age, your anticipated pension and Social Security benefits, and/or your risk tolerance. 

Tortoise

Older and/or more risk-averse investors may opt to choose a different balance of investments between the intermediate/fixed income/stable pot and the long term/growth/variable pot.

Thankfully, as an educator, you likely have a defined income stream (pension and Social Security) in your later years and may not need as much money (and take on as much risk) as those non-educators without the magic pot.

One of the biggest challenges to retirement planning is longevity — essentially will your retirement investments last until you reach your finish line? Having the magic pot in place means that you might be able to safely accept slower and steady growth of your additional investments over time. 

Hare

Young investors can usually afford to put more of their money in riskier growth investments because retirement is decades away and they need and want their investments to grow in value. While they should still have an emergency fund, they can afford to accept some additional risk in exchange for potentially greater returns. And, as I shared earlier, stocks (specifically the S&P 500 index) have returned 7.5% annual average over a 30 year period. If you want to eventually become a millionaire educator, this is one way to do it.

Older investors who look forward to more generous pensions, Social Security, and/or have acquired financial independence may also be able to invest more aggressively and/or sustain growth investments even as they approach and enter retirement.

With a defined income stream at retirement age (pension and Social Security) you can seek to make more money (and take on more risk) since you will have guaranteed income at retirement. This may also enable you to become an FIE before retirement age, leave a sizable inheritance, and/or or die rich.

Does the magic pension pot mean I don’t have to fill the other pots?

Nope. Here’s why.

First, the mystery pot may be magic, but many current educators are in pension plans that are less generous than those enjoyed by old(er) educators. That means some magic pots are more magical than others.

Second, it’s essential to begin filling the pots as early and regularly as you can. The quantity, frequency, and efficiency of investments over decades of saving — in combination with your pension — create the magic of financial independence.

 “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” — Paul Samuelson

Whether you choose the tortoise or the hare, investing beyond your pension and Social Security contributions is essential for educators to become financially independent.

You. Can. Do. This.

Now

1. Make a simple list of your current savings and investments based on these pots.
2. Jot down the total amounts you have for each of these pots. Don’t worry about decimal points. Rounding is fine.

Next

1. Look at the totals you have for each pot and think about the following:
   1. Where do you have the most money saved or invested?
   2. How do you feel about the balances in your pots?
   3. How happy and stable is your current employment and household situation?
   4. What significant costs (medical, college, retirement) are on the horizon? 
2. Based on this informal review, set saving goals for your pots for the next year, ideally setting up automatic transfers and deposits to help make them stupidly successful.