The bucket strategy divides your retirement portfolio into separate time-horizon segments — short-term cash, medium-term bonds, and long-term stocks. The goal: never be forced to sell equities during a downturn because near-term expenses are already covered by safer assets.
The bucket strategy is a retirement income approach that segments a portfolio into distinct "buckets" based on when the money will be needed. Each bucket holds assets appropriate for its time horizon — cash for immediate needs, bonds for medium-term, and stocks for long-term growth. The strategy is designed to reduce sequence-of-returns risk by decoupling near-term spending from stock market volatility.
How It Works
A typical three-bucket setup:
| Bucket | Time Horizon | Asset Type | Purpose |
|---|---|---|---|
| 1 — Cash | 1–2 years | Savings, money market | Fund immediate living expenses |
| 2 — Income | 3–7 years | Bonds, fixed income | Refill Bucket 1, moderate growth |
| 3 — Growth | 8+ years | Stocks, equities | Long-term growth to beat inflation |
The workflow:
- Spend from Bucket 1 for monthly living expenses
- Refill Bucket 1 from Bucket 2 periodically (annually or semi-annually)
- Refill Bucket 2 from Bucket 3 when stock markets are favorable
- During bear markets, stop refilling from Bucket 3 — let equities recover while living off Buckets 1 and 2
The key insight: with 2–7 years of expenses in cash and bonds, a retiree can ride out most bear markets without selling equities at depressed prices.
Why It Matters for Retirement Planning
The bucket strategy's primary value is behavioral, not mathematical. Research shows that a single diversified portfolio with systematic rebalancing produces similar financial outcomes. But the bucket strategy offers something rebalancing doesn't: psychological comfort during market crashes.
When markets drop 30%, a retiree with a single portfolio may panic-sell. A retiree with a bucket strategy can look at 2+ years of expenses sitting safely in cash and bonds, making it far easier to stay the course and let stocks recover.
It also provides a natural framework for thinking about asset allocation in terms of spending needs rather than abstract percentages — a more intuitive approach for many retirees.
A Practical Example
A 65-year-old retiree has $1,200,000 and needs $48,000/year:
| Bucket | Allocation | Amount | Covers |
|---|---|---|---|
| 1 — Cash | $96,000 | 8% | 2 years of expenses |
| 2 — Bonds | $240,000 | 20% | 5 years of expenses |
| 3 — Stocks | $864,000 | 72% | Long-term growth |
If stocks drop 35% in year one, the retiree's equity bucket falls to $562,000. But they don't need to touch it — Buckets 1 and 2 cover nearly 7 years of expenses. By year 3 or 4, markets have historically recovered enough to begin refilling Bucket 2 from equities at better prices.
Frequently Asked Questions
- How many buckets should a retirement portfolio have?
- The classic approach uses three buckets: short-term (1-2 years of expenses in cash), medium-term (3-7 years in bonds), and long-term (remaining years in stocks). Some planners use four or five buckets for finer granularity, but three captures the core benefit without unnecessary complexity.
- Does the bucket strategy actually improve retirement outcomes?
- Research shows the bucket strategy produces similar mathematical outcomes to a single well-diversified portfolio with regular rebalancing. Its primary benefit is behavioral — it gives retirees the confidence to stay invested in stocks during downturns because they know their near-term expenses are already covered in cash and bonds.
- How do you refill the short-term bucket?
- When stock markets are up, sell from the long-term equity bucket to refill the medium-term bond bucket, which in turn refills the short-term cash bucket. During market downturns, spend from the short-term cash bucket without selling stocks, giving equities time to recover.