When it comes to retirement, one of the biggest concerns for many people is this: Will I run out of money? After working hard for decades, you want your retirement to be stress-free, not filled with anxiety about market crashes, inflation, or unexpected expenses.
That’s where the Bucket Strategy shines.
The bucket strategy is a simple, yet powerful way to organize your retirement savings. It gives you clarity, control, and confidence—no matter what the market is doing. It’s not a magic formula, but for many retirees, it feels pretty close.
Let’s explore what it is, how it works, and why so many retirees swear by it.
The Big Idea Behind the Bucket Strategy
The bucket strategy divides your savings into three “buckets,” each designed for a specific time horizon:
- Bucket 1: Short-Term Needs
- Bucket 2: Medium-Term Income
- Bucket 3: Long-Term Growth
Instead of treating all your retirement savings as one big pile, this strategy breaks it down based on when you’ll need to use the money. That means you don’t have to worry about pulling money from your stock investments in a down market just to pay your bills. You’ve got a plan for that.
Here’s how each bucket works.
Bucket 1: Short-Term (Years 1–3)
Purpose: To cover your immediate income needs—housing, groceries, insurance, etc.
This is your safety net. Bucket 1 usually holds cash, money market funds, CDs, or short-term bond funds—anything that’s low-risk and easily accessible. You don’t expect this bucket to grow, but that’s okay. Its job is to give you peace of mind, knowing your living expenses are covered regardless of market swings.
If the market dips, you’re not forced to sell stocks or other volatile investments. You just dip into Bucket 1, knowing the rest of your portfolio can ride out the storm.
Bucket 2: Medium-Term (Years 4–10)
Purpose: To generate reliable income once Bucket 1 starts to run dry.
This bucket often includes conservative income-producing investments like intermediate-term bonds, bond ladders, preferred stocks, dividend-paying ETFs, and possibly annuities. These assets offer a balance between income and stability. They may fluctuate a bit, but not as much as stocks.
As you use money from Bucket 1, Bucket 2 gradually becomes your new income source. When you’re about 3 years away from needing funds in Bucket 2, you can begin to refill Bucket 1 from here.
Bucket 3: Long-Term Growth (Years 10+)
Purpose: To grow your money over the long haul and outpace inflation.
This is where your more growth-oriented investments live: stocks, equity mutual funds, REITs, or even low-cost ETFs with a growth focus. Because you won’t need this money for a decade or more, you can afford to take some risk here.
Over time, the goal is for this bucket to replenish Buckets 1 and 2. When markets are strong, you can sell high and transfer profits into the safer buckets.
Why Retirees Love the Bucket Strategy
Here are a few key reasons this approach is so popular with retirees:
- ✅ It provides structure.
You always know which part of your money is for today, tomorrow, or years down the road. - ✅ It helps manage risk.
By not keeping all your eggs in one basket (or all your money in stocks), you can protect yourself from market downturns. - ✅ It reduces stress.
You won’t need to panic every time the market drops, because your short-term needs are already covered. - ✅ It offers flexibility.
You can adjust the buckets based on your age, risk tolerance, and income needs. - ✅ It creates a smoother retirement income stream.
No more guesswork about which account to tap for your bills—just follow the buckets.
A Real-Life Example: Meet Dave and Linda
Dave and Linda are both 70, recently retired, and living comfortably in Oregon. They’ve saved a total of $600,000 for retirement and are collecting Social Security, which covers about 60% of their monthly expenses. They want a strategy that gives them a dependable income without constantly worrying about stock market ups and downs.
Here’s how they use the bucket strategy:
- Bucket 1 ($90,000) – Covers 3 years of spending above Social Security. They keep this in a high-yield savings account and short-term CDs. This bucket helps them sleep at night.
- Bucket 2 ($210,000) – Holds a mix of bond funds and dividend-paying ETFs. This bucket will support them in years 4 to 10, when Bucket 1 runs low.
- Bucket 3 ($300,000) – Invested in a diversified portfolio of low-cost stock ETFs and REITs for long-term growth. This bucket isn’t touched for now, allowing it time to recover from market dips and grow.
Each year, they review their buckets and adjust as needed—refilling Bucket 1 as it empties and rebalancing Bucket 3 if it has grown too large. Their financial advisor helps them make those decisions, but they feel confident and in control of their money.
How to Get Started with Your Own Bucket Strategy
You don’t need to be rich or work with a financial planner to benefit from this strategy. You can start organizing your accounts right now:
- Calculate your annual expenses.
Figure out what you’ll need each year, beyond Social Security or pensions. - Set up Bucket 1.
Aim to have 2 to 3 years of income needs in cash or near-cash equivalents. - Build Bucket 2.
Use bonds, bond ETFs, or other steady income investments to support years 4–10. - Invest Bucket 3 for growth.
Use low-cost stock ETFs or mutual funds to stay ahead of inflation and grow your portfolio. - Review annually.
Replenish Bucket 1 as needed and rebalance Bucket 3 when markets are strong.
Final Thoughts
The beauty of the bucket strategy lies in its simplicity. It removes the guesswork, keeps your retirement plan organized, and helps you maintain both peace of mind and financial stability throughout your retirement years.
Instead of reacting to the news or stock market swings, you can stick to your plan—because your plan already accounts for the ups and downs of life.
If you’re ready to reduce retirement anxiety and build a smart, sustainable income plan, give the bucket strategy a closer look. You might just find it’s exactly what you’ve been looking for.
This post is an excerpt from my book: The Bucket Strategy for Retirees: The Proven System to Avoid Running Out of Money in Retirement, available now at Amazon.com in paperback or eBook formats.
Are you using buckets in your retirement plan yet?
Disclaimer: For Educational Purposes Only
The content on this website is intended for general educational use and should not be considered personalized financial, legal, or tax advice. Always consult a qualified professional before making financial decisions. All investments carry risk, and past performance is not a guarantee of future results. The author assumes no liability for actions taken based on this content.