The Bucket Strategy for Retirement Income

When markets drop 30%, the last thing you want is to sell stocks at the bottom to pay your grocery bill. The bucket strategy solves this by organizing your retirement savings into time-based segments, so you always know where your next few years of income will come from, regardless of what markets do.

The Three-Bucket Framework

The classic bucket strategy divides your portfolio into three segments based on when you'll need the money:

Bucket 1: Now (1-2 years of expenses)

• Cash, money market funds, short-term CDs
• Purpose: Cover immediate living expenses
• Goal: Stability and liquidity, not growth
• Typical allocation: 10-15% of portfolio

Bucket 2: Soon (3-7 years of expenses)

• Short and intermediate-term bonds, bond funds
• Purpose: Refill Bucket 1 as needed
• Goal: Modest growth with low volatility
• Typical allocation: 30-40% of portfolio

Bucket 3: Later (8+ years)

• Stocks, stock funds, real estate, growth investments
• Purpose: Long-term growth to combat inflation
• Goal: Maximize growth over time
• Typical allocation: 45-60% of portfolio

A Practical Example

You spend from Bucket 1. Each year (or when markets are favorable), you refill Bucket 1 from Bucket 2, and refill Bucket 2 from Bucket 3.

If stocks crash? You don't touch Bucket 3. You have 7 years of expenses in Buckets 1 and 2 to ride out the storm. By the time you need to tap Bucket 3, stocks have likely recovered.

The Psychological Benefit

The bucket strategy's greatest value may be psychological rather than mathematical. Knowing you have 2+ years of expenses in cash, untouched by market volatility, makes it far easier to stay calm during downturns.

Many retirees panic-sell during crashes, locking in losses at the worst time. The bucket strategy provides a mental framework that prevents this: "My immediate needs are covered. I don't need to sell stocks. I can wait."

Refilling the Buckets

Regular refilling: Once per year, move enough from Bucket 2 to Bucket 1 to cover next year's expenses. Move from Bucket 3 to Bucket 2 to maintain target allocations.

Opportunistic refilling: After strong stock market years, take some gains from Bucket 3 to top up Buckets 1 and 2. This is essentially "selling high."

Delayed refilling: After market crashes, delay refilling from Bucket 3. Let it recover. Your cushion in Buckets 1 and 2 gives you this flexibility.

Variations on the Theme

Two-bucket approach: Simplify to just "safe money" (2-3 years cash/bonds) and "growth money" (everything else). Easier to manage, similar benefits.

Income bucket: Add a bucket specifically for income-producing investments (dividend stocks, REITs, bonds) that throw off cash to refill Bucket 1 automatically.

Legacy bucket: If leaving money to heirs is a goal, add a fourth bucket of long-term growth investments you never plan to touch.