A Step-by-Step Guide to a Retirement Strategy That Keeps You Calm, Confident, and Covered
Retirement isn’t just about having enough money—it’s about knowing that money will be there when you need it. For many retirees, that peace of mind comes from a simple, powerful strategy: the bucket strategy.
The bucket strategy divides your retirement savings into three time-based “buckets,” each designed to meet your income needs for a different period of retirement. It gives you a plan to handle market volatility, rising expenses, and the unexpected—without losing sleep or selling stocks at the worst time.
In this post, we’ll walk through how to set up your three buckets step-by-step and show you how to customize each one with the right mix of cash, bonds, and stocks based on your goals and timeline.
Why Use the Bucket Strategy?
Think of the bucket strategy as a financial safety net with a plan:
- It helps protect your short-term needs from market volatility
- It ensures you always have money available—without panic selling
- It allows your long-term investments to grow without interruption
- It gives you structure, so you don’t have to guess where to pull income from
Instead of relying on one big pool of money, you divide your savings into three distinct buckets based on when you’ll need the money.
Let’s walk through how to set up each one.
🔹 Bucket 1: Immediate Needs (Years 0–2)
This is your short-term safety bucket. It holds enough cash to cover your income needs for the next 1 to 2 years. This money should be liquid, stable, and not affected by the stock market.
What goes in Bucket 1:
- High-yield savings accounts
- Money market accounts
- Short-term CDs
- Treasury bills
- Checking or cash reserves
Purpose:
- Cover basic living expenses
- Avoid withdrawing from stocks or bonds during a market dip
- Help you sleep at night knowing your near-term needs are covered
How much to put in:
Estimate your annual income gap (after Social Security, pensions, etc.) and multiply by 2.
Example: If you need $25,000 a year from your savings, Bucket 1 should hold $50,000.
🔹 Bucket 2: Medium-Term Stability (Years 3–7)
This is your income bridge bucket—money you’ll use in the mid-term, once Bucket 1 runs low. It should provide stable income and modest growth without too much risk.
What goes in Bucket 2:
- Short- and intermediate-term bond funds
- Individual bonds
- Fixed-income ETFs
- CDs laddered over several years
- Dividend-paying conservative stocks (in small amounts)
Purpose:
- Provide income as Bucket 1 gets refilled
- Keep a buffer between you and market swings
- Grow slightly while preserving capital
How much to put in:
Multiply your annual income gap by 5.
Example: If you need $25,000/year, Bucket 2 should hold around $125,000.
Replenish Bucket 1 with proceeds from Bucket 2 (interest, dividends, or maturing bonds).
🔹 Bucket 3: Long-Term Growth (Years 8+)
This is your growth engine. You won’t touch this bucket for years—so you can invest it more aggressively and let it grow. Because of the long time horizon, you can afford to weather market ups and downs.
What goes in Bucket 3:
- U.S. and international stock ETFs
- Dividend growth stocks
- REITs (real estate investment trusts)
- Small-cap or value-oriented funds
- Low-cost mutual funds with long-term growth goals
Purpose:
- Keep pace with (and hopefully outpace) inflation
- Refill Bucket 2 when markets are strong
- Maximize the longevity of your portfolio
How much to put in:
The remainder of your retirement savings.
Example: If you have $600,000 total and you allocated $50,000 to Bucket 1 and $125,000 to Bucket 2, you’d place $425,000 in Bucket 3.
How the Buckets Work Together
Here’s how to manage the buckets over time:
- Withdraw monthly income from Bucket 1.
- Refill Bucket 1 from Bucket 2 (via interest, dividends, or maturing bonds).
- Replenish Bucket 2 from Bucket 3 when markets are doing well (ideally once a year).
This keeps your short-term money safe while giving your long-term money room to grow.
Tailor the Buckets to Your Needs
Your buckets don’t need to be rigid. Customize them based on your risk tolerance and goals:
- More conservative? Add more to Buckets 1 and 2, and keep less in stocks.
- More growth-oriented? Shift more to Bucket 3 and use higher-yield bond funds in Bucket 2.
- Want inflation protection? Add TIPS (Treasury Inflation-Protected Securities) or dividend growth ETFs.
There’s no one-size-fits-all approach—but the bucket framework gives you a solid starting point.
Real-Life Example: Meet Jim and Linda
Jim (67) and Linda (65) just retired with $700,000 in savings. They receive $35,000 a year from Social Security but need $25,000 more to meet their lifestyle.
Here’s how they set up their buckets:
- Bucket 1: $50,000 – 2 years of income in a high-yield savings account
- Bucket 2: $125,000 – Laddered CDs and a short-term bond ETF
- Bucket 3: $525,000 – Diversified stock ETFs and dividend growth funds
They sleep well knowing they have cash on hand, predictable mid-term income, and long-term growth.
Final Thoughts
The bucket strategy gives you more than just a portfolio structure—it gives you confidence.
Instead of reacting emotionally to market swings or scrambling to figure out where your next withdrawal should come from, you’ll have a clear, time-tested plan to follow.
With your needs divided into short-, mid-, and long-term goals, you’ll feel calmer, more in control, and better prepared to enjoy retirement on your terms.
This blog post is adapted 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 and eBook formats. Inside, you’ll find real-life examples, detailed investment breakdowns, and everything you need to confidently set up your own buckets.
Disclaimer: This content is for informational and educational purposes only. It does not constitute financial, investment, or tax advice. Please consult a qualified financial advisor before making decisions about portfolio structure or retirement withdrawals.