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A WHILE BACK, I was speaking with a fellow who had recently retired. He shared this observation, only half-jokingly: “Working was easy,” he said. What he meant was that financial management during our working years is more straightforward than it is in retirement. We earn and save and hope that our savings grow. But when we get to retirement, it becomes more complicated to know exactly how to manage those savings.
In the 1950s, a Ph.D. student named Harry Markowitz developed a framework to help investors answer this question. His approach, which is now known as modern portfolio theory, provided new insights on how to effectively diversify a portfolio. He later won a Nobel Prize for this work. But useful as it was, modern portfolio theory involved a lot of math and didn’t offer investors any practical help in managing their savings. Other academic theories have emerged over the years, but all of them involved similar levels of complexity.
It was for that reason that in 1985, financial planner Harold Evensky developed an idea that’s now known as the “bucket strategy.” The idea is that investors—especially those in retirement—should segment their portfolios. To understand this idea, we can look at a simple example.
Suppose Tom is a recent retiree and planning to withdraw 5% of his portfolio each year for the next several years. To protect against a potential stock market downturn, it would be reasonable for him to hold five years worth of withdrawals in some combination of cash and short-term bonds, since that corresponds, more or less, to the length of the worst stock market downturns we’ve seen in modern times.
In Evensky’s model, cash and bonds would be the first bucket, and the math is straightforward: If Tom wants to withdraw 5% each year and wants to set aside enough for five years, then he’d hold 25% (that is, 5% x 5) in the first bucket. With that 25% allocated to bonds for stability, Tom could then feel free to allocate the remaining 75% to stocks.
The benefit of this structure is that Tom would then have the flexibility to withdraw from either the stock or bond side of his portfolio depending on where the stock market stood in any given year. Most importantly, by putting a wall between his stocks and his bonds, Tom would be able to avoid selling stocks during market downturns.
The bucket concept can be very useful, but it’s important to know that there isn’t just one bucket strategy. Since Evensky first introduced the idea 40 years ago, a handful of alternatives have evolved.
Evensky’s original structure consisted of just two buckets. This makes it simple and easy to manage. A downside, though, is that bonds can still lose money, so neither of the two buckets could be considered truly safe. In 2022, in fact, total-bond market funds lost more than 10% of their value, and it took several years for investors to get back to even.
Thus, one of the most popular ways to structure a bucket portfolio is to add a third bucket, for cash. To be sure, cash doesn’t offer much growth potential. But it would’ve been extremely helpful in a year like 2022, when both bonds and stocks lost money.
While it provides more protection, the downside of a three-bucket approach is that it’s more complicated and somewhat harder to manage. Proponents, however, argue that it doesn’t require much more effort than traditional portfolio rebalancing and is well worth the effort.
In his book, The Aspirational Investor, Ashvin Chhabra lays out another bucket alternative. Chhabra is less concerned with the distinction between bonds and cash. Instead, he advises investors to focus on the riskier side of their portfolios. He suggests that investors distinguish between standard, publicly-traded stock market investments and any alternative assets, such as private funds and real estate, that they might hold. Chhabra feels this segmentation is important because of the nature of alternative investments. They’re a little like lottery tickets: They can turn into home runs but can also go to zero.
If you’re constructing a portfolio and like the idea of a bucket approach, which way should you go?
Since each of these approaches has merit, you could combine them all, creating a four-bucket setup, consisting of cash, bonds, stocks and alternatives. That wouldn’t be unreasonable, but it would also ratchet up the complexity level.
Here’s the approach I recommend: First, like Chhabra, I would draw a distinction between traditional assets and alternatives. Traditional, publicly-traded investments, including standard stock and bond mutual funds and ETFs, would go in your core portfolio. These are the assets around which you’d build your plan.
Alternatives, if you own them, would go in their own separate bucket. In general, I don’t recommend these types of assets because their performance is more variable and more unpredictable, and because they tend to carry higher fees. But if you already own some alternatives, I’d separate them from your financial plan and view them only as a bonus if they deliver value. In other words, make sure that your financial plan will still work if you were to rely on only your core portfolio.
Within the core, I’d have just two buckets: one for stocks and one for bonds. The result is that you would have just two buckets, plus alternatives, if you happen to own them.
But what about cash, since, as we saw earlier, bonds aren’t guaranteed and can certainly lose money? In my view, a dedicated, separate cash bucket isn’t necessary. Instead, what I recommend is to be diligent in diversifying your bond holdings. I wouldn’t own a total-bond market fund. Instead, take a building block approach, holding some short-term and some intermediate-term bond funds. Short-term funds will shine when rates are rising because they’ll decline much less than total-market funds. Intermediate-term bonds, on the other hand, will shine when rates are dropping. You could also add some inflation-protected bonds to round out your holdings.
At the end of the day, the best portfolio structure is the one that’s simple to manage while also protecting your savings from whatever surprises the market delivers.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.
General commentary on the Bucket Strategy as well as hopefully a helpful response to “tip sophomore comment and questions below.
While clearly there are numerous variations to the “Bucket Strategy” it need not be complicated or time consuming nor are there set rules as some seem to think there are.
It is merely a construct that for some, organizes the thought process on how to invest various portions of an overall retirement portfolio.
I find the compartmentalization of the buckets to be helpful and allows me to be more aggressive with the “Bucket #3” funds which by design are not to be used for over 10 years thanks to buckets #1 and #2.
To be fair, I did spend quite a bit of time designing and “test flying” my Bucket Strategy over at least a 10 year period prior to retirement.
The goal was to generate inflation adjusted income (assumption of 3% annual inflation) into perpetuity.
During pre retirement my salary/other income stood in as Bucket #1 while I filled up/overfilled Buckets #2 and #3.
It also gave me a very clear “glide path” into retirement. I could easily tell when My buckets “runeth over” and opted to work a bit longer anyway for good measure adding to bucket #3.
Upon retirement, I filled up Bucket #1 (two years income) with a severance payment and some excess funds in Bucket #2.
Thereafter for the last 6 years I only look at and rebalance my buckets once per year (twice max). This takes about an hour right after tax time.
Some key points and counter to some of the assumptions and myopia in the case of the author of the Forbes article linked by “tipsophomore” :
a) One does indeed rebalance equity and bonds etc. in a bucket strategy. Most of the rebalancing is WITHIN bucket #3 in particular and in my case within bucket #2 as well as I have a conservative equity component within my mid term bucket. Rebalancing the various bond funds is sometimes needed as well. Again, this is a once or twice a year exercise.
b) In my design I do not move assets from bucket #2 to #3. That’s unnecessary complexity. Bucket #2 is just designed to keep pace with inflation or better and to top-off bucket #1 once a year after I withdraw my inflation adjusted annual “salary”. Bucket #3 is designed to exceed inflation and grow long term (10 or 11 years out thanks to bucket #1 plus bucket #2 from any point in time). If there is a down year in bucket #3, I rebalance from the smaller bond allocation percentage WITHIN bucket #3.
c) There is no requirement to refill bucket #2 from bucket #3 in down year(s) ….unless we have a very long string of down years.
That’s a key attribute of the Bucket Strategy. Bucket #2 is the key time “buffer” between buckets #1 and #3 which empowers a more aggressive investment allocation in Bucket #3.
Adam,
Great article.
I see you recommend a mix of short- and intermediate-term bonds. Do you have any suggestions on how one would allocate the bond portion across treasuries and investment grade corporate?
When I think of net worth and buckets, I look at what is taxable and what isn’t. Anything taxable is discounted by the estimated tax rate.
I was never enthusiastic about buckets. It’s more complicated to implement and execute.
I concentrate on total portfolio Sharp ratio = risk-adjusted returns.
The easiest is to keep a constant AA (asset allocation) of bonds + stocks using allocation funds. For the buy and hold for decades or in order to make my wife’s investment decisions easier, I set up a written plan for her to invest in only 3 funds.
I only trust 2 choices indexes + Vanguard funds managed by Wellington for long term hold. Wellington Management is the oldest, it’s conservative, team style, and not one dominant manager, with a very cheap expense ratio. Since our money isn’t with Vanguard, we would have to own the more expensive funds (not Admiral), but it’s still cheap.
For a younger age, until age 75 and still having a taxable account…50% VWINX(40/60)…taxable=20% VWAHX(HY Muni)…30% VSMGX (60/40 invested in 2 US + 2 international indexes). Since HY Muni bonds are hybrid, this portfolio is more like 40/60.
Older than 75 or taxable account is gone: 40% VWINX(40/60)…30% VWEHX(HY Corp)…30% VSMGX(60/40). Since HY Corp bonds are hybrid, this portfolio is more like 35/65(stocks/bonds).
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Another good choice is to own up to 5 funds, maybe 3 indexes and 2 managed funds, each fund is all bonds or stocks.
To maintain your target asset allocation and generate cash for expenses, consider selling shares of the fund that has appreciated the most over the previous 3–6 months. This naturally trims your winners, helps control risk, and can keep the portfolio closer to its desired allocation without requiring frequent trading.
The beauty of this approach is its simplicity: a small number of funds, minimal maintenance, and a disciplined rebalancing process.
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As long as I’m managing the portfolio, I will be using my style, which is unique bond funds, trading every several months, and avoiding market meltdowns. Since retirement in 2018, I have achieved 11.7% annually using only bond funds, which equals a Sharpe Ratio > 3.
With your statement,”I have achieved 11.7% annually using only bond funds…”
I assume you mean you achieved 11.7% across your whole portfolio while using only bond funds in your fixed income portion of your portfolio. Can you confirm my assumption or clarify? Thanks.
Adam, you all but described our exact bond strategy: one-third short-term, one-third intermediate-term, and one-third inflation protected. The exact makeup of the three portions varies. Short-term is mostly mutual funds and ETFs. (There is one two-year T-Note thrown in.) Intermediate-term is also a mix of mutual funds and ETFs. Inflation protected is all individual TIPS (mostly 5-year) and I-Bonds.
How to maintain the 2 buckets (stocks, bonds/cash) on the time continuum, usually at end of each year? Re-balance to target allocation can deplete cash/bond bucket fast when stocks are down. Maintaining 5 years in cash/bonds when stocks are down makes paper loss real and permanent.
Specifically, are there any well-known/practiced approaches regarding when and how much to top-up each bucket from the other?
Jonathan Clement’s 2025 article partially answers these questions (see item 4).
Adam’s article discusses some of the other challenges with bucketing strategy.
A Forbes article critiquing bucket strategy and describing an alternative.
I think it also varies by your total investable assets. Someone with 100 million that isn’t spending like crazy has a better buffer than someone with 1 million.
As a DIYer I also worry about my wife taking over if I’ve gone to meet my maker. I don’t want to leave her with a bunch of decisions to be made. The simpler the better for me.
We’ve been using a four-bucket set up for about two years now and really like the way it helps me spend confidently and not worry about sequence of returns risk.
My first bucket is a cash bucket, which is in effect our checking account. This is how we pay bills and spend money.
Our second bucket is a bond ladder. It has five year’s worth of the equivalent of our fixed expenses. These bonds (actually MYGAs) are not variable and have a fixed interest rate of around 5 1/2%.
Our third bucket is a regular investment portfolio comprising stock and bond ETFs, set up with a 70/30 asset allocation.
The fourth bucket is what I call non-allocable. This bucket contains a mix of my wife’s pension fund and some private equity preferred stock that throws off a fixed dividend of 10%. Although these assets are ill liquid, I don’t consider either of them particularly risky. These assets are included in the 70/30 asset allocation with bucket three.
With this set up we have a decent level of passive income from the portfolio. That, combined with using spending guard rails and less than 50% of our annual spending budget going to fixed expenses, gives us lots of flexibility in reducing our decumulation rate in the case of a market downturn if needed.
This isn’t necessarily retirement account related but twenty years ago before we ever heard of the bucket approach my wife suggested that we have different savings buckets for different purposes.
We have a car, a vacation, and a general bucket that we put money into monthly. Since then we’ve never made payments on our vacations or our cars. We don’t go on the vacation or purchase a vehicle until we have cash saved up to buy it
Adam, another good one, thanks. At the end you seem to give TIPS a lukewarm “you could also add.” Do you not see TIPS as being that important as part of one’s in- retirement bond holdings?
As always Adam another good article. I chose the 2 bucket approach similar to the Buffett 90% equities and 10% treasuries. My 2 bucket approach is 85% equities stocks, no private investments and 15% cash. The cash tides you over during the downturns so you do not have to sell any stocks. It has been working well over the last 10 years, now age 80.