Building wealth and achieving financial independence isn’t just about earning a high income—it’s about making strategic decisions to grow and protect your money. On a recent episode of the Don’t Retire… Graduate! podcast, Eric Brotman sat down with Jude Wilson, Chief Financial Strategist at Centrus Financial Strategies, to discuss practical strategies for high earners and retirees alike. From tackling the “tax time bomb” to shifting your mindset around money, here are the key takeaways to help you on your journey to financial freedom.

1. Recognize the “Tax Time Bomb” in Retirement Accounts

Many people automatically contribute to their 401(k)s and IRAs with each paycheck, assuming they’re building a secure nest egg for retirement. However, as Wilson explained, these accounts come with a “silent partner” in the form of the IRS. Traditional retirement accounts are tax-deferred, meaning you’ll owe taxes on withdrawals in retirement—potentially at higher rates than today.

Some things to consider are:

• Roth Conversions: Move funds from traditional 401(k)s or IRAs into Roth accounts where withdrawals will be tax-free. This can help mitigate future tax liabilities, especially if you believe tax rates will rise.
• Understand the SECURE Act’s Impact: The elimination of the “stretch IRA” means non-spouse beneficiaries must withdraw inherited IRA funds within 10 years, potentially pushing them into higher tax brackets. Planning ahead can minimize this burden for your heirs.
• Bracket Bumping: Convert amounts up to your current marginal tax bracket to avoid unnecessary tax pain while still benefiting from Roth accounts.

2. Diversify Your Tax Buckets

When we talk about diversification, we most often think of spreading our investments over different asset types. However, we should be thinking about tax diversification as well as investment diversification. By allocating your savings across taxable, tax-deferred, and tax-free accounts, you can better manage your tax liability in retirement.

• Taxable Accounts: These include brokerage accounts where you pay taxes annually on dividends, interest, and realized gains.
• Tax-Deferred Accounts: Traditional 401(k)s and IRAs grow tax-free but are taxed upon withdrawal.
• Tax-Free Accounts: Contributions to Roth IRAs and Roth 401(k)s have already been taxed. Therefore, they offer tax-free growth and withdrawals, shielding you from future tax hikes.

Having a mix of these “buckets” allows you to withdraw funds strategically based on the tax landscape at the time.

3. Build a Purpose-Driven Plan

Wealth-building isn’t just about accumulating money—it’s about creating a financial plan that aligns with your goals, values, and lifestyle. Wilson emphasized the importance of understanding what you want to achieve and reverse-engineering your financial strategy to make it happen.

Key Concepts:

• Paychecks and “Playchecks”: Ensure your plan covers essential expenses (paychecks) while also allowing for discretionary spending on things that bring you joy (playchecks).
• Plan for Longevity: With people living longer, your financial strategy should account for decades of retirement, ensuring you don’t outlive your money.

4. Shift Your Money Mindset

Your mindset around money can be just as important as your financial strategies. As Wilson’s father told him, “I could leave you this house full of money, but if you don’t have the right mindset, you’ll lose it all.”

Our mindsets are impacted by experiences we’ve had since childhood, so taking the time to understand the way we think about money can help us make more strategic choices.

Tips for a Healthy Money Mindset:

• Focus on Financial Freedom: Instead of aiming for a specific retirement age, prioritize reaching financial independence so you can choose how and when to work.
• Avoid Scarcity Thinking: Even in retirement, maintaining an abundance mindset can help you enjoy the wealth you’ve built without unnecessary fear or guilt.
• Balance Health and Wealth: Wilson learned by experience that wealth means little without good health. Prioritize both for a fulfilling life.

5. Use a Bucket Strategy for Retirement Income

Buckets aren’t just for tax diversification; they’re also a popular method of asset segregation. Traditional retirement planning often involves treating all your savings as one big bucket and withdrawing a percentage each year, but this approach can be risky, especially during market downturns. Instead, using a strategy to separate assets lets you form different “buckets” of money that are allocated for specific timeframes and goals.

For example, here is one way to build your bucket strategy:

• Short-term bucket: This bucket should remain liquid so you’re able to draw from it easily to cover expenses for the next 1-5 years. This could include cash, certificates of deposit, and money market accounts.
• Intermediate-term bucket: You don’t need this money yet, but you don’t have too much time to build it back if you lose it to a market downturn. Therefore, this bucket should be invested with conservative to moderate risk so it’s able to grow while remaining available to draw from in 5-10 years.
• Long-term bucket: This bucket has the longest time horizon, so it can be treated with the most amount of risk. Because you won’t need to touch it for a decade or so, a market downturn won’t necessarily tank your retirement plan.

Play Chess, Not Checkers

Building and preserving wealth requires strategic, forward-thinking planning. It’s not just about making money—it’s about keeping it, growing it, and using it to live a fulfilling life. By addressing the “tax time bomb,” diversifying your income streams and tax buckets, and adopting a healthy money mindset, you can create a financial plan that supports your goals today and in the future.

For more insights like these, check out the Don’t Retire… Graduate! podcast and explore resources like Jude Wilson’s website, thetaxbomb.com, to learn how to take control of your financial future.