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What It Is & How It Works

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Usually, when people think about retirement, they focus on putting away money. They think about how much to save, where to invest it, and how many years they think they’ll need money.

This part of preparing for retirement is certainly essential. But it’s equally important to create a workable withdrawal strategy, so you don’t outlive your savings.

One withdrawal strategy worth considering is the retirement bucket strategy. Let’s take a look at the details.

The Short Version

  • The retirement bucket strategy is a three-phase portfolio allocation. It covers living expenses and long-term growth and even a cushion in between the two.
  • You’ll need to determine the amount of money in each bucket based on your expected retirement expenses, anticipated income, and current or projected portfolio size.
  • Each bucket requires a different investment mix to provide optimal results.
  • The retirement bucket strategy is highly workable, but it’s not the right choice for everyone.

What Is the Retirement Bucket Strategy?

The retirement bucket strategy involves creating three different asset allocations, or “buckets,” each with a different withdrawal timeframe.

  • An immediate bucket
  • An intermediate bucket
  • A long-term bucket

The purpose is to create a system in which you have a certain amount of cash to access for living expenses at any given time while also maintaining the portfolio growth you need so you don’t outlive your money.

Depending on who recommends the strategy — and it’s not unusual for financial advisors to do so — the three buckets can have different names. For example, the immediate bucket may be called a cash or liquid bucket. But it doesn’t matter what you call them because the purpose of each bucket is the same regardless of the label.

Note that the retirement bucket strategy isn’t a one-size-fits-all approach. You can tweak and customize it to meet your own retirement needs.

Depending on your preference, you can divide your buckets into separate accounts or hold them in a single one.

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How the Retirement Bucket Strategy Works

To get started, determine how much income your portfolio will need to generate to cover your living expenses each year in retirement.

For example, let’s say your pre-retirement income is $100,000 (before taxes), and you determine you’ll need to replace 80% of that income in retirement, or $80,000. Since you can expect $55,000 from Social Security and pensions, your portfolio will need to provide you with $25,000 per year in income to make up the difference.

After you determine your annual requirement for portfolio income, you can create a workable allocation based on the number of years of income each bucket will hold.

With most retirement bucket strategies, the immediate bucket will hold two years of portfolio-generated income, the intermediate bucket will hold five years, and the long-term bucket will hold the balance.

Let’s go back to our example. With an annual portfolio income requirement of $25,000 and a total retirement of $500,000, your retirement portfolio will look like this:

  • Immediate bucket – $50,000 ($25,000 X two years)
  • Intermediate bucket – $125,000 ($25,000 X five years)
  • Long-term bucket – $325,000 [$500,000 – ($50,000 + $125,000 from the first two buckets)]

The Three Retirement Buckets

Next, let’s look into the three retirement buckets and discuss the purpose each serves and the types of assets each will need to hold.

? Immediate Bucket

As the name implies, this bucket needs to provide you with immediate cash income. For that reason, funds will need to be in ready liquid form. That means mostly cash and cash equivalents.

The sole purpose of this bucket is to provide you with ready funds for living expenses during the first/next two years of your retirement. It also ensures your living expenses are covered no matter what happens in the financial markets. Even if your long-term bucket loses value, your living expense allocation is set for at least two years.

Recommended assets: Short-term, low-risk securities. While you’ll undoubtedly want to earn interest on this bucket, you won’t want to sacrifice liquidity or the safety of the principal for a return. Recommended assets include savings accounts, short-term certificates of deposit, short-term bonds, and money market accounts.

? Intermediate Bucket

This bucket serves as a buffer in your portfolio. In contrast to the immediate bucket, you can afford to take a little bit of risk in search of higher returns. In the years ahead, this bucket may be a source of funds after you exhaust your immediate bucket.

One of the problems with investing in your retirement years is that you don’t have time to make up for market declines. This bucket adds at least five years (but it could be as long as seven or ten years if you prefer) to your investment time horizon.

You maintain a buffer of seven years or more when combined with the immediate bucket. That should enable you to recover from most bear stock markets.

Recommended assets: Medium-term interest- and dividend-paying assets with low levels of risk. The idea is to protect the principal and provide sufficient returns to keep up with inflation. Assets might include longer-term certificates of deposit, dividend-paying stocks, intermediate U.S. Treasury securities, investment-grade corporate bonds, and even blue-chip stocks.

? Long-term Bucket

This bucket keeps you from outliving your savings. It will generally be invested in higher-risk, higher-return assets that you won’t need for at least seven years.

Construct this bucket in such a way that it outperforms inflation. Even though you’re in — or will be in — retirement, this type of investing is still absolutely necessary. The size of this bucket depends on the size of your portfolio and your immediate need for income.

Recommended assets: High-growth investments. This bucket has a longer-term horizon, so you have time to recover from any losses. The bucket might contain growth stocks, real estate investment trusts (REITs), commodities, and other asset classes likely to outperform inflation over the long run. You can use investment funds, individual stocks, or a mix of both.

Rebalancing/Replenishing the Three Retirement Buckets

This is where the retirement bucket strategy gets a bit complicated. Like all portfolios, it does need to be rebalanced periodically, and it has three components.

You should rebalance your portfolio of three retirement buckets the same way you would with any other portfolio. If the long-term bucket grows rapidly, you’ll want to move funds into the immediate and intermediate buckets to maintain your target allocations.

You need to reallocate and rebalance each time you significantly draw down the immediate bucket. Decide the lowest number you’ll allow the immediate bucket balance to go before you begin selling off holdings in the long-term bucket to replenish it.

However, if the stock market is down significantly, you can also choose to replenish the immediate bucket from the intermediate one instead. That’s why you have a minimum five-year cushion in the intermediate bucket. As stocks resume a growth cycle, you can sell assets from that bucket to replenish the money in the intermediate bucket.

It’s possible to sell long-term assets when prices are high and buy when they’re low using the above mentioned strategy. And when they are low, you’ll transfer funds from the intermediate bucket to fund those new stock purchases.

Of course, if you’re still in the retirement portfolio-building process, you’ll fund asset purchases from payroll contributions and savings in the long-term growth bucket.

Retirement Bucket Strategy Pros and Cons


  • Three buckets mean you can ride out downturns in the financial markets. You’ll keep two (or more) years of living expenses in the immediate bucket and still have at least five years of expenses in the intermediate bucket. That will give you plenty of time to recover from any short-term losses in the long-term bucket.
  • The portfolios can be configured any way you like. If you have a lower risk tolerance, you can keep seven or more years of living expenses in the intermediate bucket and reduce the long-term bucket. You can even adjust as you age and your risk tolerance becomes more conservative.
  • The strategy is designed to provide a solid mix of liquidity and long-term growth.
  • You’ll still be able to take advantage of the “buy low, sell high” investment strategy by buying risky assets when prices are low, and selling when they’re high.


  • A small retirement portfolio can leave you overweight in cash and fixed-income investments, with little to spare for the long-term bucket. That would compromise your retirement in the later years.
  • It’s possible to miscalculate. The most obvious way is is to underestimate how long you’ll live. But another example is overestimating the returns on the long-term bucket.
  • If you’re not willing or able to set up and maintain the retirement bucket strategy yourself, you’ll need to hire a financial advisor to do it for you. That will involve paying a fee that will reduce your long-term investment returns.
  • If a bear market lasts more than a few years, you may draw down your intermediate and long-term buckets too quickly, which may limit your ability to recover from losses.
  • If your portfolio is large in relation to your annual income needs, your long-term bucket may be excessively large. For example, you may allocate 75% to the long-term bucket when you only need 50% based on your age and risk tolerance.
  • Managing the retirement bucket strategy can be complicated if you attempt to do it out of a single account or a combination of several. Ideally, you’ll want to have a separate account for each bucket to understand how much is in each.

How Do You Choose Which Retirement Strategy To Use?

Whichever retirement strategy you choose, evaluate the pros and cons carefully and if the strategy will fit well within your overall financial situation.

For example, the retirement bucket strategy requires sufficient money to adequately fund all three buckets. And it’s unlikely most retirees will be able to rely on the strategy for 100% of needed retirement income (unless you have a retirement portfolio of several million dollars).

Also, be aware that no retirement strategy is perfect. Consult trusted financial advisors before implementing this or any other investment strategies.

Don’t wait until retirement to make that consultation, either. Like most retirement strategies, the retirement bucket strategy will need to be implemented during the accumulation phase of your retirement portfolio. That means it will need to be up and running when retirement arrives. And by then, it may be too late to make significant changes.

Other Ways To Save for Retirement

Obviously, the retirement bucket strategy isn’t the only way to save for retirement. In fact, it’s a plan based primarily on the end goal — proper allocation and distribution of your assets in retirement.

Other strategies to consider (among others) include:

The 45% rule. This strategy dictates that individuals should aim to build up enough savings to generate 45% of their pre-tax income once they reach retirement.

The systematic withdrawal strategy. This is probably the most straightforward strategy because it applies a fixed percentage withdrawal rate to your retirement portfolio, however much it is. For example, if you withdraw 4% per year (the so-called safe withdrawal rate), you’ll apply that percentage to your balance each year. Since the withdrawals will come from proportionate sales of each portfolio allocation, annual rebalancing will be automatic.

The downside to this strategy is that it could result in reduced withdrawals during years when the value of your stock portfolio declines.

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The Takeaway: Is the Retirement Bucket Strategy Right for Me?

If you’ve been diligent in saving and investing money for retirement, you owe it to yourself to employ a workable distribution strategy for when that day arrives. The retirement bucket strategy can accomplish that goal. However, it’s not the only option, so investigate various retirement strategies thoroughly before making a decision.

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