FREE NEWSLETTER
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.