Should You Use a Bucket Strategy for Retirement Income?

Key Takeaways:

• A bucket strategy separates retirement assets by time horizon to balance current spending and long-term growth.

• Clear withdrawal and replenishment rules can help manage spending during market downturns.

• Coordinating buckets with taxes, Social Security, and other income sources supports a more complete retirement plan.

A retirement portfolio has two important jobs: providing cash for current spending while keeping enough invested for a retirement that may last several decades.

Those goals can sometimes compete. Keeping too much money in cash may limit long-term growth, while keeping too much in volatile assets can pressure you to sell during a market downturn.

A bucket strategy organizes retirement assets around when you expect to need the money. The idea is simple, but the strategy's effectiveness depends on how you structure, replenish, and coordinate the buckets with the rest of your retirement income plan.

Bucket Strategy: How It Works for Retirement Income

A bucket strategy divides retirement assets according to time horizon rather than treating the portfolio as one pool of money.

Money needed in the near future may be held in cash or relatively stable investments. Assets not needed for many years can remain invested for income and long-term growth.

Before building the buckets, retirees should consider how much dependable income sources, such as Social Security, pensions, or annuities, already cover of their spending. The remainder is what the investment portfolio may need to provide.

The number and size of buckets can vary, but a three-bucket structure is a common way to organize the strategy.

How the Three Retirement Buckets Can Be Structured

Each bucket should have a clear purpose and time horizon, rather than dividing investments into arbitrary categories.

Bucket #1: Near-Term Spending

The first bucket typically holds cash or cash-like assets for near-term withdrawals and spending.

Having money available for current expenses may reduce the need to sell stocks during a market decline. This can help when markets are temporarily down, and the retiree prefers not to sell long-term investments at lower prices.

However, holding too much cash also creates trade-offs. Cash generally has lower expected returns than growth-oriented investments, and inflation can gradually reduce its purchasing power.

The appropriate amount depends on the household’s spending needs, dependable income sources, investment allocation, and desired cash reserve.

Bucket #2: Intermediate Income and Stability

The second bucket is generally intended for spending needs beyond the immediate cash horizon.

It may include high-quality bonds or other relatively conservative investments that can provide income and potentially help replenish the cash bucket over time.

These investments can be less volatile than stocks, but they are not risk-free. Bonds can still be affected by interest rate changes and inflation.

The goal is to provide greater stability for intermediate-term needs while keeping longer-term assets positioned for growth.

Bucket #3: Long-Term Growth

The third bucket typically holds diversified, growth-oriented investments for money you may not need for many years.

Maintaining meaningful equity exposure can help a portfolio keep pace with inflation and support a retirement that may last several decades.

This bucket will generally be more volatile than the first two. Because of that, don't rely on it for immediate spending during a downturn.

The longer time horizon gives these investments more opportunity to recover from short-term market fluctuations and continue supporting future needs.

Decide How the Buckets Will Fund and Replenish Retirement Spending

A bucket strategy needs more than an initial allocation. Retirees also need rules for where withdrawals come from and how to refill depleted buckets.

That does not necessarily mean spending Bucket #1 completely before moving to Bucket #2.

Instead, the buckets can work together. Interest, dividends, bond maturities, portfolio rebalancing, or selling appreciated investments may replenish the near-term cash bucket.

For example, after a period of strong market performance, a retiree may rebalance part of the portfolio and direct some of those gains toward future spending needs.

The replenishment process should respond to market conditions without becoming an excuse for emotional or reactive investment decisions. Clear rules can help retirees make more disciplined decisions during volatile markets.

Coordinate Withdrawals With Taxes

Investment buckets and tax accounts are not necessarily the same thing.

You may hold cash, bonds, and stocks across taxable accounts, traditional retirement accounts, and Roth accounts. That means deciding which investment to sell is different from deciding which account to withdraw from.

Withdrawals may affect income taxes, required minimum distributions, capital gains, and the household’s broader tax strategy.

Following bucket order without considering taxes can create unnecessary tax consequences,s even if the investment allocation makes sense.

A retirement income strategy should therefore coordinate investment decisions with the household’s overall withdrawal and tax plan.

Pros and Cons of a Bucket Strategy

A bucket strategy can make retirement spending easier to visualize, but it doesn't eliminate investment or longevity risk.

Like any retirement strategy, it has both potential benefits and drawbacks.

Potential Benefits

A bucket strategy can create a clearer connection between a portfolio and upcoming spending needs.

Potential advantages include:

• Reducing pressure to sell volatile investments during market declines when sufficient near-term reserves are available.

• Helping retirees separate money needed soon from assets intended for long-term growth.

• Creating a practical framework to organize cash, bonds, and equities across time horizons.

• Helping some retirees remain more disciplined during periods of market volatility.

For retirees who prefer a clear structure, the buckets may also make the portfolio easier to understand and follow.

Potential Drawbacks

The strategy can also introduce additional complexity.

Holding too much cash or conservative investments may reduce long-term growth potential. Maintaining multiple buckets also requires ongoing decisions about withdrawals, replenishment, and rebalancing.

Poor refill rules can still lead to selling investments at unfavorable times or allowing the portfolio to drift from its intended allocation.

A bucket strategy also does not automatically produce better financial outcomes than other disciplined withdrawal approaches.

Its value depends on whether the structure supports sound investment and spending decisions over time.

Should You Use a Bucket Strategy?

A bucket strategy may appeal to retirees who want to separate several years of near-term spending from more volatile investments.

The structure can make it easier to see which assets are intended for current needs and which are meant to support future growth.

However, it may be less useful for someone who already follows a disciplined total-return withdrawal and rebalancing strategy or prefers managing the portfolio as a whole.

The decision should reflect the household’s broader financial situation, including:

• Guaranteed retirement income

• Expected portfolio withdrawals

• Risk tolerance

• Tax situation

• Investment allocation

• Time horizon

• Desired cash reserve

The key question is not whether a bucket strategy is universally better. The key question is whether the structure helps the household generate sustainable income while maintaining an appropriate long-term investment plan.

Bucket Strategy for Retirement Income FAQs

1. What Is the Best Retirement Income Strategy?

No single strategy fits every retiree. A retirement income plan should consider dependable income sources, spending needs, portfolio withdrawals, taxes, risk tolerance, and investment allocation.

The goal is to create a sustainable income-generation process while keeping enough of the portfolio positioned for future needs.

2. What Is a Three-Bucket Retirement Strategy?

A three-bucket retirement strategy divides assets by time horizon.

The first bucket generally covers near-term spending, the second supports intermediate needs with more conservative investments, and the third holds growth-oriented investments for longer-term goals.

3. How Much Cash Should You Keep in a Retirement Bucket?

The appropriate amount depends on the household’s spending needs, dependable income, investment allocation, risk tolerance, and desired cash reserve.

Too little cash may force you to sell volatile assets during a downturn. Too much may reduce long-term growth potential.

4. How Often Should You Refill Your Retirement Buckets?

Replenish buckets according to a defined strategy.

Possible sources include interest, dividends, bond maturities, rebalancing, and sales of appreciated investments. The timing should reflect the household’s withdrawal needs and overall investment plan.

5. What Are the Disadvantages of a Bucket Strategy?

Potential disadvantages include holding too much in lower-growth assets, adding complexity, and needing clear rules for withdrawals and replenishment.

A poorly managed strategy can also cause the portfolio to drift from its intended investment allocation.

6. Does a Bucket Strategy Help Reduce Sequence-of-Returns Risk?

Maintaining near-term reserves may reduce the need to sell volatile investments during a market decline.

However, a bucket strategy does not eliminate investment risk or guarantee better outcomes. Its effectiveness depends on the household’s asset allocation, withdrawal needs, and replenishment process.

Get Help Building a Retirement Income Strategy That Fits Your Plan

A bucket strategy can provide a useful framework for retirement spending. Still, the amount held in each bucket and the rules for replenishing them should reflect the household’s actual income needs and financial situation.

A financial advisor can help coordinate Social Security, pensions, portfolio withdrawals, taxes, cash reserves, investment risk, and rebalancing into one retirement income strategy.

The goal is not simply to organize assets into buckets. It is to create a sustainable process for generating income while keeping enough of the portfolio positioned for future needs.

If you would like help building a retirement income strategy that fits your financial plan, schedule a complimentary conversation with The Capital Group.