One of the most common concerns among retirees is the possibility of outliving their savings. Even individuals with substantial assets may experience uncertainty around market fluctuations and future income streams. Navigating these challenges often involves thoughtful planning, especially as timing needs and risk tolerance shift throughout retirement.
A structured strategy—often called the “bucket strategy”—can help retirees organize their assets by time horizon. This approach may assist in aligning income needs with investment allocation in a way that supports long-term sustainability while considering tax efficiency.
In this article, we’ll explore how this framework can support retirement income planning.
What Is the Bucket Strategy?
The bucket strategy is a retirement income planning method that segments a retiree’s assets into separate “buckets,” each intended to support different time-based objectives. The purpose is to help align investment allocation with anticipated cash flow needs and varying levels of risk tolerance over time.
Bucket 1 typically includes liquid assets such as cash or money market funds, intended to cover near-term expenses—usually the first 1 to 3 years of retirement.
Bucket 2 may hold a conservative mix of fixed income and equities for intermediate needs over the following 3 to 7 years.
Bucket 3 generally contains growth-oriented investments, such as a higher allocation to stocks, for use in later years.
While results can vary, this structure may serve as a framework for organizing assets in a way that aligns with withdrawal needs, while accounting for market fluctuations and personal financial objectives.
Bucket Strategy Hypothetical: Addressing Income Concerns in Retirement
Imagine a retiree in her 80s who, despite having a well-funded portfolio, feels ongoing concern about running out of money. This kind of anxiety is common and often isn’t tied to actual shortfalls, but to uncertainty about how long savings will last or how market changes may affect available income.
In a situation like this, a bucket strategy can provide a helpful framework. For instance, setting aside three years of anticipated expenses—such as $5,000 per month—in a money market fund may offer near-term stability. A second tier could consist of more conservatively invested assets, used to refill the cash portion over time. A third segment may be structured for longer-term growth, with a higher equity allocation.
While this approach does not eliminate risk, it may help organize assets by time horizon and offer a more structured, adaptable income planning method—one that considers both financial realities and common concerns in retirement.
Building the Buckets: Aligning Investments with Time Horizons
Bucket 1: Short-Term Needs
This approach is intended to offer easy access to cash while limiting exposure to market volatility. Drawing from non-qualified assets in this stage may also contribute to short-term tax management, depending on individual circumstances.
Bucket 2: Intermediate-Term Needs
The second bucket is designed to meet expenses expected within three to seven years. Investments in this bucket usually have a more conservative allocation, balancing:
Fixed income securities like bonds (around 70%)
Equities or stocks (around 30%)
This mix is designed to provide some growth potential while seeking to moderate volatility. Over time, funds may be shifted from this bucket to Bucket 1 to address short-term cash needs, based on the retiree’s strategy.
Bucket 3: Long-Term Growth
The third bucket focuses on financial needs beyond seven to ten years. It is generally invested with a higher emphasis on growth, often holding:
A larger proportion of stocks (60–80%)
A smaller allocation to bonds and fixed income
Equities have historically demonstrated higher return potential over longer periods, although this involves greater market exposure. The impact of short-term volatility may be less pronounced when investments are held for extended timeframes, though outcomes are never certain.
This tiered approach aims to balance liquidity, risk, and growth according to the retiree’s time horizons and financial objectives.
Why The Bucket Strategy May Be Worth Considering
The bucket strategy is one way to organize retirement assets by time horizon, and it may offer some advantages depending on a person’s situation:
May help reduce exposure to short-term market volatility, by limiting the need to sell long-term assets during downturns.
Can support greater clarity around cash flow planning, which some individuals find helpful for decision-making.
Encourages a structured approach to aligning investment allocations with anticipated spending timelines.
Allows for potential tax planning opportunities, such as sequencing withdrawals or considering Roth conversions.
This approach does not eliminate investment risk or predict results, but it may offer a flexible structure that individuals can adapt based on their financial goals, preferences, and comfort with risk.
Potential Tax Benefits of a Bucket-Based Approach
A bucket strategy may also support tax-efficient retirement planning by creating opportunities to manage when and how different types of income are recognized. For example, drawing from non-qualified accounts in the early years—such as cash or taxable brokerage funds—can help limit taxable income during periods when required minimum distributions (RMDs) haven’t yet begun.
During those lower-income years, individuals may have more flexibility to convert traditional IRA assets to Roth IRAs at potentially lower tax rates. This can help diversify future tax exposure across account types. Meanwhile, tax-deferred and tax-exempt accounts can remain invested for longer, possibly benefiting from additional compounding.
Structuring withdrawals across different buckets may support coordinated investment and tax strategies over time. Since tax laws and outcomes can vary, the bucket approach can be reviewed and adapted based on evolving goals and changing circumstances.
Who Might Benefit from a Bucket Strategy
The bucket strategy may be useful for individuals who want a structured approach to managing retirement income across varying time horizons. It can be especially helpful for:
Those concerned about market volatility, who prefer to separate near-term spending from long-term investments.
Retirees without predictable income sources, such as pensions, and who rely primarily on their savings.
Individuals seeking a way to coordinate investment and tax planning, particularly when managing multiple account types.
People who value visual clarity and segmentation, as the strategy offers a tangible framework for understanding where funds will come from over time.
While not suitable for everyone, this strategy may be appealing to individuals who prefer a flexible, time-segmented approach that can adapt as needs change. As with any financial strategy, it’s important to evaluate it based on individual goals, risk tolerance, and financial circumstances, with support from a qualified advisor.
The bucket strategy offers a time-segmented framework that can help individuals approach retirement income planning with greater structure and clarity. By aligning investment risk with anticipated spending needs, it may reduce reliance on reactive decisions and support a more consistent approach over time.
Although it does not remove market risk or predict results, the strategy may be adapted to reflect changing needs, tax considerations, and risk tolerance. As part of a broader financial plan, it may serve as a tool for organizing assets, planning withdrawals, and managing change during retirement.
Disclosures
Content provided through a collaboration with Paul Axberg and Schnebly Hill Digital Marketing. This content was generated using the help of AI research, and is intended for informational purposes only. Please consult a qualified professional for personalized advice. For specific estate planning advice, please consult a qualified estate planning attorney.
