TL;DR: A retirement bucket strategy organizes your savings based on when you expect to spend the money, helping connect near-term withdrawals with longer-term investing. This guide explains how the three-bucket approach works, how to refill each bucket, and how taxes, market risk, and other withdrawal strategies fit into the plan.
Main points:
- A three-bucket strategy typically separates money for immediate expenses, the next several years, and later retirement.
- Cash and shorter-term investments can cover upcoming withdrawals, while stocks may provide long-term growth potential.
- Rebalancing can help restore your target asset allocation while also replenishing spending buckets.
- Bucket strategies differ from total return approaches but can work alongside a glidepath.
- Taxes, RMDs, inflation, and sequence of returns risk can affect how you manage withdrawals and refill buckets.
You spent years building your retirement savings, and now you need a spending plan. The retirement bucket strategy groups savings by when you expect to use them. Here’s how it works and how it compares with other approaches.
What Is the Bucket Approach to Retirement?
The bucket approach to retirement separates your savings into groups for near-term, medium-term, and later expenses. It shows which money you will spend soon and which you can leave invested longer.
You can track buckets within one portfolio; you do not need three accounts.
The approach works alongside asset allocation in retirement, which describes how much of your portfolio you hold in cash, bonds, and stocks. Your buckets give those investments a job. They do not change how much you need to save or guarantee that your money will last.
How Does a Three Bucket Retirement Strategy Work?
A three bucket retirement strategy matches each part of your portfolio to a different spending horizon. The time horizons depend on your circumstances.
Bucket 1: Money You May Need Soon
This bucket holds money for upcoming withdrawals. Cash, savings accounts, and other liquid holdings make it easier to pay expenses without selling stocks during a market decline.
Start with your annual spending gap: subtract dependable income, such as Social Security or a pension, from your planned expenses. If you expect to spend $70,000 a year and receive $50,000 in dependable income, your portfolio must supply about $20,000 a year. A two-year spending bucket would then start around $40,000, before you account for changing expenses or an emergency reserve.
Bucket 2: Money for the Next Several Years
The second bucket can hold investments you expect to use after the first one. Bonds and other fixed-income holdings often play this role. They can still lose value when interest rates rise or issuers struggle.
Bucket 3: Money for Later Retirement
The third bucket holds investments you may not need for many years. It often includes stocks for long-term growth. Growth can help offset inflation over a long retirement, but stocks carry market risk. Charles Schwab explains how retirees can set different time horizons for each bucket.
How Do You Spend from and Refill the Buckets?
You generally take routine withdrawals from your near-term bucket. Then you review your spending plan and decide when and how to replenish it. Interest, dividends, maturing bonds, or sales of other investments may provide the cash.
For example, say you plan to draw $20,000 from your portfolio this year. You could take monthly payments from Bucket 1 and review the balance at year-end. If stocks performed well and now make up too much of your portfolio, selling some stock investments could restore your target mix and refill cash. If stocks fell sharply, you might draw from cash and maturing bonds while you review your options.
A long downturn or higher expenses may force you to change course. Review your withdrawals, investment mix, and tax situation regularly instead of following a refill rule on autopilot. Schwab also notes that poor returns early in retirement can hurt a portfolio more when you must keep withdrawing money. That timing problem often goes by the name sequence of returns risk.
Bucketed Retirement Income Strategy vs. Glidepath Total Return Approach
If you’re thinking about the difference between a bucketed retirement income strategy vs glidepath total return approach, it helps to separate them.
A bucket strategy labels investments by when you plan to spend them. A total return approach looks at the portfolio. Under a total return plan, you can fund withdrawals through interest, dividends, or investment sales while maintaining your chosen stock and bond mix. You do not label investments by spending date.
A glidepath describes how that investment mix changes over time. For example, a retirement fund may gradually shift toward a more conservative mix as its investors age. A glidepath can support either a bucket plan or a portfolio-wide withdrawal plan.
Buckets clarify upcoming withdrawals. A total return plan focuses on one overall allocation. Neither tells you how much to spend.
Bucket Strategy vs. Rebalancing: Do You Need Both?
The bucket strategy vs rebalancing question has a straightforward answer: the two serve different purposes. Buckets organize your money around spending dates. Rebalancing restores your chosen mix of stocks, bonds, and cash when market moves shift it.
Suppose your target mix includes 50% stocks, but stock gains push that share to 60%. You could sell some stocks, move the proceeds to cash or bonds, and bring the mix closer to your target. That move may also refill a spending bucket. You should check the overall portfolio too.
Is a Bucket Strategy Right for You?
A bucket plan can help if market declines make you uneasy about withdrawals. Seeing money for upcoming expenses in cash or shorter-term holdings may help you follow your plan through a rough year.
But the approach takes work. You need to monitor balances, refill buckets, and check your overall allocation. If you keep too much in cash, inflation may erode its purchasing power and leave less invested for long-term growth. A bucket plan also cannot protect you from losses or tell you the right withdrawal amount.
Before you choose an approach, ask how much income your savings must provide, how you will respond to market declines, and how often you want to review your investments. Consider taxes and account withdrawal rules when you decide where to take money.
How Do Taxes and Required Withdrawals Fit into the Buckets?
Account type affects the tax on each withdrawal. Traditional IRA withdrawals generally count as taxable income, while qualified Roth IRA withdrawals generally do not. Selling investments in a taxable account may create a capital gain or loss.
Required minimum distributions (RMDs) can also change your plan. You must take RMDs from certain retirement accounts even when Bucket 1 covers your expenses. You can use that money to refill cash or invest it in a taxable account.
Make Your Retirement Income Plan Work for You
The retirement bucket strategy offers a clear way to connect short-term spending with long-term investing. Start with your expenses and dependable income, then choose a withdrawal plan and investment mix that support your goals. Review your cash needs, tax situation, and tolerance for market swings with a retirement advisor. Need help? Get a free portfolio review.
Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.
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