How to keep away from cashing out retirement accounts

Life is a fine balance between short to medium term goals and long term investments.

There are junctions in one’s financial life on which path to choose. This can be in the form of various scenarios.

  • Investing in retirement accounts vs. paying off debt
  • Investing in long term stocks or illiquid real estate vs. keeping cash for emergencies
  • Investing for growth vs. income.
  • Emergency funds in low yielding cash account vs. taking a bit of risk via index funds.

Recently in the pandemic and recovery euphoria, I invested in a rental real estate.

However right after that, looking up the college expenses for my child, I realized that my savings for the purpose may not adequately cover all the scenarios.

This dilemma is very frequent for middle aged people when they are balancing multiple priorities and at the same time, have limited runway to grow (think compounding) their retirement savings.

I have seen families breaking their long term commitments and withdrawing funds from retirement accounts for meeting unplanned obligations, or even bad financial decisions like buying a larger house.

I have thought about this behavior (including in myself) quite a lot and developed a plan to address it.

The Bucket and Tap Approach

The main technique to overcome this is to follow the Bucket and Tap approach. The bucket is not something new that I invented, but a well known concept in personal finance management.

The Bucket approach is very similar to asset allocation for investments. Just like asset allocation means spreading your investments into different non-correlated assets classes like stocks, bonds, real estate, cash, gold etc., the bucket approach for allocating all your funds into various financial buckets is also kind of an asset allocation.

The Tap part is directing a predictable cash flow into the defined buckets. This along with the time horizon of a goal, can help the bucket meet the desired outcome.

This allocation decision has few steps.

  • The available funds to be put into separate buckets depending on the visibility of goals right now. For example, lock the money already in retirement accounts as filing up the Retirement Bucket. This cannot be then used for any other shorter term goals.
  • For the short term goals, allocate the rest in order of how soon the goal is to be reached. For example, an emergency fund needs to be immediately filled.
  • For the medium term goals, allocate future cash flows in appropriate proportions to meet the cash requirements.
  • The future cash flows need to be sufficiently predictable otherwise any unexpected shortfall will cause severe stress and regret.

Let us take one example for a middle aged person’s various responsibilities.

  • Retirement account has $50000.
  • Cash in savings/checking account: $5000
  • Expected cash flow : $2000 per month after other expenses taken care of
  • Unvested stocks to be vested over next 4 years: $5000 each year
  • There may be some year end bonus but not guaranteed
  • Education funds needed starting in another 3 years : $80,000 ($20,000 for 4 years)
  • Emergency Fund required: $15000
  • Home downpayment required in 3 years: $30000

In the above, the Education funds and Home downpayment may stick out as big goals. And anyone who does not analyze the cash flow correctly, will be tempted to withdraw from the retirement funds to partially meet these.

However, a bit of careful planning and forecasting will need none of that drastic action. Here is how I will do it.

  1. Emergency Fund:
    • $5000 from savings/checking account
    • $2000 from cash flow for next 5 months
  2. Education Fund:
    • Save $1000 from month 6 till month 36: $30000
    • Stock vested over next 4 years: $20000
      • First two years ($40000) cost taken care of with $10000 carry forward.
    • $36000 more can be saved $1000/month for another 3 years (month 37 till 72).
  3. Home downpayment:
    • $1000 from month 6 till month 36: $30000
  4. Retirement account:
    • $50000 present value
    • Put any year end bonus every year into IRA
    • Divert the $1000/month after home downpayment is achieved.

As you can see, there was no need to take any knee-jerk reaction, like withdrawing retirement fund or going into more debt (student loans, hard money loan for home etc.).

The Final Plan (step by step)

Here is the final plan with a timeline based allocation (bucket) and cash flow (tap).

  1. 0-5 months:
    • Move $5000 from checking/savings to an emergency fund.
    • $2000/month save towards emergency fund
    • Emergency Fund achieved: $15000 Time Taken: 5 months
  2. 6-36 months:
    • $1000/month into education fund will accumulate $30000
    • $1000/month into home downpayment fund will accumulate $30000
    • Home downpayment achieved: $30000 Time Taken: 3 years
    • Allocate the vested stock for 3 years: $15000 to education fund
    • Education Fund accumulated: $45000 (Two years of college taken care of)
  3. 36-72 months:
    • $1000/month continued for education will accumulate another $36000
    • $1000/month invest in retirement account will grow retirement funds
    • Allocate the last vested stock option: $5000 to retirement fund
    • Education Fund achieved: $81000 Time taken: 6 years (one year before end of college)
    • Retirement Fund grew to: $91000 ($50000 + $36000 + $5000)
  4. Beyond 72 months:
    • Start investing the $2000 every month to keep growing the retirement fund.
    • Or Allocate towards other obligations or goals as we did for first 5-6 years.
    • Back to a growth path of investing. Time taken: 6 years

We did not use the unpredictable year end bonus. The above goals can be further accelerated if there is any windfall at the end of any year.


We have just worked out a step-by-step cash flow allocation to address big ticket goals.

With a fair amount of certainty and absolutely no debt, the plan keeps the retirement funds intact yet funds all the goals, which initially seemed lofty.

Photo by Andrea Piacquadio on

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