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The choice, of course, depends on the individual situation. I came across this “three bucket” strategy that is intriguing.
First bucket is cash that meets near term needs ( one to two years of living expenses other than guaranteed income like social security. This avoids withdrawal of investment funds during market downturns, particularly in early retirement years, which could cause “sequence of return risk” resulting in running out of money in later years.
The second bucket, covering the next five years, could be in bonds and bond funds. Income distributions will make up for spending from the cash bucket, when needed.
The third bucket is all stocks, focused on long term growth depending on risk tolerance.
This article explains more:
https://www.cnbc.com/2025/03/25/retirees-protect-portfolios-stock-market-downturn.html
Jonathan wrote a post, ‘Spending It’, where he outlines 5 withdrawal strategies. That might be worth a read to see what works best for you.
https://humbledollar.com/2025/01/spending-it/
This article in HD explains bucket strategy also quite well.
When we enter retirement, we no longer have a regular paycheck. This situation creates uncertainty which can affect our enjoyment of life. Even when working, we might worry about the future success of our employer as that might threaten our flow of income.
So, when we retire, how can we achieve enough peace of mind to cope with this uncertainty. It has often been suggested at HD that this can be achieved through purchase of an annuity that might replace enough income so that with Social Security one has the equivalent of their paycheck. Actually making this purchase is in itself a challenge. When interest rates are low, annuity prices are high and we might not be able to purchase a large enough annuity. Or, we might distrust the insurance company, or maybe we want to have assets to pass on the heirs, etc. So, if we do not purchase the annuity we need some other kind of plan that will still let us achieve that peace of mind.
I use the word plan because it infers actions that we will take that let us feel safe about our finances. Of course, our real problem is that we are thinking creatures. Our brains are noisy things that are constantly being stimulated by the massive flow of information in our culture. It is impossible, unless one lives off the grid, to wall oneself away from the flow. As a result, doubt creating ideas abound. A mental frame of reference like the 3 Bucket Strategy, can help us fight off these doubts, and maintain our mental discipline. After all, once you have your financial assets allocated between stocks bonds and cash, how you mentally think about the numbers doesn’t change them. If it gives you peace of mind though, it is a good thing for you.
“A mental frame of reference like the 3 Bucket Strategy, can help us fight off these doubts, and maintain our mental discipline.”
The bucket strategy, knowing I have 2 years of cash and 8 of variety of bonds is allowing me to sleep well at night.
I just learned something about the bucket approach I thought others might find interesting. In her recent book How to Retire, Christine Benz of Morningstar (who’s cited previously in this thread) says when she picked up the approach from financial planner and professor Harold Evensky, he was much more minimalist about it – his was basically a total return portfolio with a chunk of cash added onto it, for those rare times when both stocks and bonds are down. The whole point was just to make it easier for his clients to stomach down markets, which it did.
So I wanted to put together a very basic one-page-guideline that should help such people to go from zero to hero in a minimal amount of time. The goal is to provide basic educational material for soon-to-be private investors. I am aware that there are other sources out there, but experience shows that saying “I once made something that will help you” really improves chances of actual impact :slight_smile:
I too like a bucket strategy, but decided it was becoming too complicated with little benefit from the added complication. After a few years I made it as simple as possible.
Today I want one bucket to cover expenses for 5-10 years with little concern about market downturns. The second bucket is invested in equities with an allocation that should provide growth and some returns, including dividends. These can flow into the cash bucket.
I’d prefer that these “buckets” not require frequent maintenance and so they are structured that way. The first bucket of cash and bonds is simply allocated to deal with inflation as best as I can. A portion is in a spending account to cover monthly bills and pays little interest. The rest is in so called “high yield” savings, CDs and bonds. Because bond funds are included, I consider these to be liquid and can move funds easily to the spending account but avoid early fees for cashing out of CDs. With current high yields on savings having CDs isn’t as important and cash is competitive with bonds.
In practice there are things to do annually, including the taking of RMDs and review. Re-allocation is no longer an annual affair for me. I do monitor the overall health of our funds to assure we won’t run out in our projected lifetimes.
After living in a low-interest on savings environment the current situation has altered the balance. My first bucket is growing, which is a pleasant surprise.
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Three bucket approach simplifies finances to some extent. You could avoid complex withdrawal strategies. Agree, the change in interest rate environment requires repositioning.
If one has accumulated enough, and has adopted a sufficiently modest lifestyle, surely the best bucket is having enough on the fixed-income side to cover all your expenses for as long as you live. The bonds are for you and the equities for your survivors; you don’t have to care what the stock market does.
My strategy is similar. Make sure fixed-income covers living expenses (including inflation), have a cash/bond cushion for unexpected expenses and invest the rest in stocks. Sit back and relax.
We don’t use the bucket strategy. (We use a safety first flooring approach, other use total return/safe withdrawal rate). Nothing wrong with a bucket strategy but it is essentially mental accounting for asset allocation. Some good resources on the bucket strategy are Christine Benz at Morningstar who has written about it extensively and has model portfolios and Fritz Gilbert at The Retirement Manifesto who has a lot of details on implementation.
The bucket strategy always seems to me like it’s a way to convince people to be more conservative if they’re overly aggressive or more aggressive if they’re overly conservative. Once you’ve got your buckets, it’s the same as any other asset allocation strategy, except re-filling the buckets seems way more complex than rebalancing.
Disclosure: I’ve been removing complexity from our financial picture because I don’t want to deal with it and I don’t think my wife would deal with it if I pre-decease. So maybe that drives my perceptions?
We have built our retirement portfolio based on the Bucket Plan since 2020. Our FA gave us the book “The Bucket Plan: Protecting and Growing your assets for a worry-free Retirement” by Jason Smith before we engaged him. This strategy was the way they structured their clients portfolios for retirement. I read the book and the strategy made a lot of sense to me and my wife. These buckets based on timing/ needs of assets allows us to mix conservative and aggressive approaches to take advantage of various asset classes and time frames without excessive risk.
Now almost two years into retirement, we don’t stress about the recent market turmoil as our impacted buckets (which have done exceptionally well the past 2 years) won’t be needed for years to come.
There are many articles and financial columnists who write about variations of this strategy including Chrsitine Benz of Morningstar but few give mention to the Jason Smith book.
Many people are given credit for coming up with the bucket portfolio concept.
However, Harold Evensky, a wealth manager and retired professor, developed the bucket strategy in the 1980s as a way to manage retirement income, particularly in a low-interest-rate environment.
Personally, I see no need for the Three Bucket approach. Just have your investment portfolio and an emergency/cash “bucket.”
I think the purpose of calling the portions of the portfolio as buckets is more of a mental framing of the assets.
The cash bucket is for 1-2 years of spending- this bucket is to put your mind at ease that no matter what the market does in the near future you know this money is safe.
The second bucket of 4-9 years of bonds (mostly of intermediate length) is intended to stretch the returns a bit, with less risk (however didn’t work in ‘22 with the worst year I bond history). Bucket two’s mental set is to know that if there is a bear market the first two buckets if combined contains 10 years total of spending needs, will get you through to market recovery in just about all scenarios without having to tap your stock portfolio when the markets are down significantly.
Then bucket three contains the balance of your portfolio, 100% in stocks, which are there to obtain inflation beating returns, and potentially grow your overall portfolio balance.
All that being said as I have written previously we by nature, are frugal spenders, and thus have never required a budget even when raising two children. We just paid ourselves first, then spent the rest. At the present time we are retired and living off of a moderate inheritance (thank you Mom and Dad), until we reach 70 and claim our Social Security benefits.
Our current allocation is 10% cash, 45% bonds, and the balance equities. We were previously at 50% cash and bonds, and 50% equities but Morningstar research shows that for new retirees a retirement portfolio allocation as low as 20% bonds can obtain nearly the same returns as a higher allocation of stocks due to the current interest rates, but with less volatility.
When we turn 70 we will have a SS benefits sufficient to meet most if all our spending needs and then will most likely change to Morningstar’s aggressive bucket portfolio.
I like the bucket strategy, but it’s starting to feel like a repackaged version of a long-followed approach to retirement income. We’re taking cash, bonds and stocks — what we oldies would call an investor’s three asset classes — and labeling them buckets. We’re then deciding on the size of the buckets based on how many years of spending they’re intended to cover, something we oldies also used to talk about. Is that it? Or is the bucket strategy more than just a rebranding exercise?
Jonathan, please see my comments above. What do you think?
Your above description is great. There’s much to like about the strategy, and it’s the sort of approach I advocate. But as I mentioned in my earlier comment, it seems to me that the bucket strategy has been slimmed down to a spending-driven asset allocation approach. I recall a time when the bucket strategies advocated were more involved. For instance, folks used to run distinct portfolios to cover five-year spending periods, with each portfolio containing some mix of stocks and conservative investments, which would then become less aggressive as the five-year spending period approached, similar to what you’d expect of a target-date fund. I’m not saying these more involved strategies were superior. But they were distinctive, rather than where we’ve landed today, where “bucket” is just another word for “asset class.” In other words, today’s bucket strategy seems to be “invest in stocks with part of your portfolio, while making sure you have enough in conservative investments to ride out a bear market and cover upcoming spending.” Is that it for the bucket approach — or am I missing something?
It’s perhaps worth noting that some of Christine’s bucket portfolios include dividend paying stocks and multi sector bond funds in bucket 2. So it is a little different than just asset classes. That said, in the whole, I agree you’re not missing anything here. I also agree with those who call it mental accounting, but of course nothing wrong with that.