Retirement Bucket Strategy

By Justin Pritchard, CFP®

When you’re getting ready to retire, you face at least three challenges, and a retirement bucketing strategy might be helpful. Some of those hurdles include:

  1. Having the confidence to stop working and start spending from assets
  2. Investing a portion of assets for long-term growth and income so that inflation does not eat away at your savings
  3. Avoiding large withdrawals during market downturns at the beginning of retirement

So, let’s explore how buckets might address those challenges.

Sometimes I work with clients who have more than enough in retirement savings and income sources, but they’re simply terrified of leaving work. That’s understandable. Life is uncertain, and walking away from health coverage and a steady income has risks.

Plus, there’s a mindset shift involved. You’ve been practicing discipline and saving for most of your working years, and then it’s time to flip the switch and spend. So how can you make that easier?

You can’t predict how markets will perform, what health issues you’ll face, and any number of things that could potentially derail a retirement plan. But a bucketing strategy might offer some peace of mind for those who are reasonably well-prepared for retirement.

On this page:

  • What is bucketing?
  • Examples of retirement buckets
  • How to use the strategy
  • Some pitfalls and alternatives

Continue reading below, or get similar information from this video.

I do not see many clients use a bucketing strategy (except for the two-bucket approach). Still, it’s helpful to understand how the strategy works so you can know what the buzz is about and decide what makes sense for you. You might also get a few ideas on managing your finances.

How Bucketing Works

A bucketing system separates your money into segments you’ll spend from over different timeframes. Sometimes the strategy is called “time segmentation.”

The promise of bucketing is that you can manage risk. While the real world can get complicated, ideally:

  • You avoid selling assets when they are down.
  • You can be confident that you’ll have the spending money you need.
  • You manage “sequence of returns risk” that comes with retiring during a market crash.

We’ll go through some examples, but you can customize your strategy in any way you want. There’s no single way to use buckets, but when you understand the concepts, you can decide what makes sense for you.

2-Bucket Strategy

Perhaps the simplest approach to retirement buckets is a two-bucket approach. Your buckets consist of:

  1. Cash holdings for the next one to three years of withdrawals (or whatever period you want)
  2. A portfolio of investments designed for long-term growth

Bucket #1 is safe money. By setting aside enough cash to cover your withdrawals for the next several years, you don’t need to worry about what the market does in the near term.

The investments in Bucket #1 often consist of:

  • Cash in bank and credit union savings or money market accounts
  • Money market funds
  • CDs and CD ladders
  • U.S. government savings bonds
  • Treasury bills
  • Fixed annuities

Those holdings will not lose value when markets crash, and they typically earn a small amount of interest.

As you enter your first year of retirement, it can be comforting to know that you have this money in a safe place. There’s no need to pay attention to the markets, and you can focus on more important things—like enjoying your time.

By the way, you may want to build up those cash holdings in the years leading up to retirement. That way, you have your cash cushion in place on Day 1 of retirement, helping you to ride out a poorly-timed market crash.

Bucket #2 may be a diversified portfolio of mutual funds and ETFs. You can also use individual stocks and bonds, if you prefer. But managing those holdings over the long term could be cumbersome, and diversifying among numerous holdings might be best. You can’t eliminate risk when you diversify, but you can potentially improve your chances.

The level of risk you take in Bucket #2 depends on your needs and preferences. For example, you might have 60% in stocks—or any higher or lower amount.

There are two ways to think about your spending with this strategy. We’ll get into more detail below, but as a high-level summary, you could:

  1. Spend from Bucket #1 and replenish from Bucket #2 systematically.
  2. Spend from Bucket #2 when investments are doing well (or the market is up), and draw from Bucket #2 during lean times.

3-Bucket Strategy

Diagram of moving assets between 3 retirement income buckets

A three-bucket approach adds another layer between the cash and long-term investment buckets. Again, there are no set-in-stone rules, but a three-bucket strategy might work as follows:

  • Bucket #1: Cash holdings for near-term withdrawals (one to three years)
  • Bucket #2: Income-generating assets to replenish Bucket #1 (four to eight years out)
  • Bucket #3: Growth assets for long-term growth (nine or more years)

You can adjust the ranges to meet your needs.

In this case, you might have roughly 10 years worth of “safe” assets to spend from before you need to sell your most volatile holdings. Looking at historical data, that would have helped you avoid selling at losses in most cases.

What types of investments go into your buckets? For a three-bucket strategy, you might include the following holdings in Bucket #2:

  • Bonds and bond funds
  • Dividend-paying stocks (without going overboard on dividend income strategies), if you have an appetite for risk
  • REITs
  • Longer-term CDs

Even More Buckets?

If you want, you can add more buckets to your strategy. But doing so is a recipe for time-consuming tasks. The more complexity you add, the more time you’ll need to spend on managing your buckets. Plus, you might need to make more decisions each year, which could defeat the purpose of developing the strategy in the first place.

Bucket Maintenance

This is where things can get complicated.

It’s easy enough to design a strategy. Intuitively, it all makes sense, and you can easily fund your buckets with the appropriate amounts and the target investment mixes.

You have a lovely set of buckets on your retirement date and in the early months. Each one has the perfect amount, and you can clearly visualize how the strategy will fund your spending in the coming years.

However, life eventually happens. Investments may start to move in directions that you didn’t expect—or they might not move at all. You might need to take unexpected withdrawals when life surprises you, possibly depleting your cash bucket earlier than planned.

Even if everything goes exactly as planned, you eventually need to shift funds from the growth and income buckets into Bucket #1. Once you take your first withdrawal you need to start replenishing. So, how exactly do you do that?

Income Payments

If you get dividend and capital gains payments from your growth or income buckets, it could make sense to direct those payments toward Bucket #1. That way, you add to your cash holdings periodically.


If you’d rather keep reinvesting dividends, you might choose to shift funds out of the income and growth buckets and move assets to your cash bucket.

Scheduled movements: For example, you might manage your buckets every six to 12 months. With the two-bucket approach, that might mean selling from your growth portfolio and moving the proceeds to cash. But that can defeat the purpose of bucketing—because you’re just selling assets on a regular schedule.

Rebalancing: You can also try to sell assets that have gained value and move the proceeds to Bucket #1 (or Bucket #2, if you’re using more buckets). That way, you’ll take profits from assets that are doing well while letting depressed assets ride—and hopefully recover. Still, you face several difficult questions:

  • How often do you do this, and what if there are no clear candidates for selling? For example, all of your assets might be down, or you might just be selling everything pro rata to keep your portfolio invested the way you want.
  • When do you rebalance? When you need to replenish cash, when your allocation goes out of balance (beyond some threshold), or on a regular schedule?


You can also try to capture gains by selling holdings that have gained value. This is similar to the rebalancing approach, but you’re more active. For example, you might say that you will take some profits if an investment rises more than 5% in a month. That could make sense, but sometimes winners run for a while, and you could potentially cut off future growth if you sell out.

How to Start Using Buckets

Waterfall chart showing how withdrawals are net of income needed

It’s probably easiest to use separate accounts for each bucket. That way, you can decide on a mixture of investments for each bucket, and rebalance each account accordingly.

For example, your long-term growth bucket might have a high level of stocks. But if the different sectors and allocations change over time, it will probably be easiest to rebalance an entire account instead of adjusting that sleeve within a bigger account.

That said, it can be done in one account.

For example, you might put enough to fund two years of withdrawals in a money market fund. Then, the next five years of withdrawals could go into moderate-risk investments in the same account. Finally, any remaining assets would go into your high-risk investments with the hope of long-term growth.

Pitfalls of Retirement Buckets

While the bucketing strategy can make sense intuitively and provide peace of mind, it’s not right for everybody.

  • It’s hard to manage: This strategy requires ongoing management. That might not be what you’re looking for in retirement, and we all face cognitive decline as we age. The more you need to do, the better the chances of making a mistake or simply neglecting to complete tasks regularly.
  • Next steps aren’t always clear: Since bucketing is not a formalized strategy, you need to choose when and how to manage your buckets. That might be fine if you pick a strategy (or follow somebody else’s model), but we don’t know what the absolute best strategy is.
  • No guarantees: The long-term assets might not grow at a sufficient rate, and income-producing assets might not provide much to replenish your cash.
  • High cash exposure: In some cases, this strategy leads to high cash levels. Having a substantial amount in cash and “safe” investments could have an opportunity cost. If your assets don’t keep up with inflation, you may have less purchasing power. That said, you might not need much growth if you’re well-funded for retirement.
  • Extended drawdowns: You might strain the early buckets and need to search selling from the high-risk bucket while markets are still down.

Alternatives to Bucketing

Given the potential drawbacks, it’s wise to explore some alternatives before you decide to go with a bucket approach.

Total Return Investing

This simple approach might bring us back to the two-bucket strategy, more or less.

With a total return strategy, you simply build a diversified portfolio that’s designed for a risk level you’re comfortable with. Then, as you need funds, you sell assets to generate cash.

You can still have a cash cushion with this approach, effectively making it a two-bucket strategy. For example, you might set aside enough cash to fund withdrawals for two years and invest the rest. However, you’ll need to have confidence that the amount you set aside is enough to ride out the worst of any downturns.

There are two ways to look at generating cash.

  • Sell winners: When you need more cash, you can sell investments that have done well. Doing so will reduce their weight in your portfolio, helping you to rebalance. If nothing is up, you would sell from your holdings proportionally.
  • Stay in balance: You keep your portfolio rebalanced. By doing so, you’re effectively selling winners and shifting funds to investments that did not perform as well recently. When you need cash, you sell from the holdings proportionally, hoping that you’re essentially spending from assets that gained value.

This might be a simpler way to go about things. If stock markets fall, you’ll have more exposure to bonds than you intended, and you’ll likely sell those holdings (and avoid selling stocks when they’re down). That’s more or less what you’re trying to accomplish with bucketing in retirement anyway.

That said, if you need to sell more than you have in excess bond holdings, you’ll be dipping into stock holdings.


Another approach might be to use guardrails. With that strategy, you attempt to address the challenges we started with (bad timing, long-term growth, etc.), but differently. For example, you might monitor how markets perform and adjust withdrawals from your accounts over time. If things are going well, you can potentially get a raise. If things go badly, you may need to make cuts.

That’s an oversimplification, of course, and if you find that interesting, you can read more about that strategy elsewhere.