The Bucket Strategy – SAFE INVESTING DIGEST

Copyright 2025 by Safe Investing Digest. All Rights Reserved

Chapter 1: What Is the Bucket Strategy—And Why Do Retirees Love It?

If you’re like many retirees, your biggest financial fear isn’t inflation, taxes, or even stock market crashes—it’s running out of money.

After decades of working, saving, and planning, you want your retirement years to be stress-free. But if you’re constantly wondering whether your nest egg will last, it’s hard to truly enjoy life. That’s where the Bucket Strategy comes in.

This time-tested approach to managing your retirement money brings structure, peace of mind, and flexibility. It’s not complicated. You don’t need to be a financial expert. And best of all—it works.

The Problem: Retirement Isn’t a One-Time Decision

When you retire, you don’t just cash in your savings and hope for the best. You’ll need a plan that helps you:

Withdraw money to live on,
Protect against market downturns, and
Keep growing your savings to last 20, 30, or even 40 years.

But traditional advice often falls short. If you put everything in “safe” investments, you risk falling behind inflation. If you stay too heavily invested in the stock market, a downturn could force you to sell at the worst possible time.

The Bucket Strategy solves this dilemma by breaking your money into three simple time-based “buckets.” Each one has a job to do.

The Three Buckets at a Glance

Bucket 1: Cash for the Short Term (0–2 years)
This bucket holds your near-term living expenses—money you’ll need right away. It’s kept in ultra-safe places like a savings account or short-term CDs. That way, no matter what the market is doing, you’ll always have money to live on.

Bucket 2: Income for the Medium Term (3–7 years)
This middle bucket is designed to refill your cash bucket every year or two. It holds assets that generate stable income, like bond ladders or dividend ETFs. It carries a little more risk than cash, but it’s still relatively conservative.

Bucket 3: Growth for the Long Term (8+ years)
This final bucket is your inflation-fighter. It’s invested in assets that can grow over time—like dividend growth stocks or index funds. Because you won’t touch this money for many years, it has time to recover from market ups and downs.

This layered approach allows you to ride out market volatility without selling at a loss. It also gives you a smart way to generate regular income without draining your entire portfolio too quickly.

Why Retirees Love the Bucket Strategy

Here’s what makes the bucket strategy so appealing:

✅ It reduces anxiety. You always know your short-term needs are covered, no matter what the market is doing.
✅ It’s practical. You can set it up with almost any size portfolio and adjust it as your needs change.
✅ It’s flexible. If you need more or less income in a given year, you can shift between buckets.
✅ It’s goal-based. Instead of thinking of your retirement money as one big pot, you give each portion a clear purpose.

Real-Life Example: Meet Tom and Linda

Tom and Linda retired a few years ago with a total nest egg of $600,000. They were nervous about investing too aggressively, but also didn’t want to miss out on growth. Their financial advisor suggested using the bucket strategy.

Here’s how they set it up:

Bucket 1 (Cash): $60,000 (two years of spending) in a high-yield savings account and short-term CDs.
Bucket 2 (Income): $240,000 in a mix of investment-grade bonds, preferred stocks, and dividend-paying ETFs.
Bucket 3 (Growth): $300,000 in a diversified portfolio of dividend growth stocks and equity funds.

In 2022, when the stock market dropped sharply, Tom and Linda didn’t panic. Their income bucket kept paying them dividends, and their cash bucket provided for everyday spending. They didn’t need to touch their growth bucket at all. By 2023, the market began to recover—and so did their long-term investments.

The result? No sleepless nights. No selling at the bottom. Just steady income and peace of mind.

Looking Ahead

In the chapters that follow, we’ll take a deeper look at each bucket:

What types of investments belong in each,
How much to put in each one,
And how to manage them over time.

Whether you’re newly retired or just starting to plan, this simple strategy can help you stay calm and confident—knowing you’ll never run out of money.

Ready to dive into Bucket 1? Let’s go.

Chapter 2: Bucket 1 – Cash for Immediate Needs (0–2 Years)

If there’s one thing every retiree needs, it’s peace of mind—especially when it comes to having enough money to pay the bills, buy groceries, and enjoy a little fun without worry. That’s exactly what Bucket 1 is designed to provide.

Think of this bucket as your financial cushion. It’s where your most accessible, dependable money lives. When the market is up—or down—it doesn’t matter. This bucket is all about safety and liquidity.

What Is Bucket 1 For?

Bucket 1 is your short-term spending bucket, typically covering your living expenses for the next 6 months to 2 years. The goal is simple: give you a reliable source of cash so you never feel forced to sell investments when markets are down.

This is the money you’ll withdraw first in retirement.

It’s not meant to grow much or earn big returns. Instead, it’s designed to stay stable so you can always count on it, regardless of what’s happening in the stock market or the economy.

What Goes in Bucket 1?

You want low-risk, easy-access, and low-volatility choices here. Good options include:

High-yield savings accounts
Simple and FDIC-insured. Great for storing part of your emergency and spending funds.
Money market accounts or money market mutual funds
These typically offer slightly better yields than savings accounts and are still highly liquid.
Short-term CDs (Certificates of Deposit)
Safe and predictable, though your money is locked up for a few months. Consider laddering a few CDs to increase flexibility.
Short-term Treasury bills or Treasury money market funds
Government-backed and very low risk, these offer a safe place to park cash with minimal concern.

Avoid putting risky or volatile investments in this bucket. Stocks, long-term bonds, and anything that fluctuates in value doesn’t belong here.

How Much Should Be in Bucket 1?

The rule of thumb is to keep 1 to 2 years’ worth of essential expenses in this bucket.

To figure this out:

Add up your monthly spending—housing, food, insurance, transportation, fun.
Subtract income sources like Social Security or pensions.
Whatever gap remains is what your investments need to cover.

For example:

You need $4,000 a month to live comfortably.
You receive $2,500 a month from Social Security.
Your investments need to provide the remaining $1,500.

In this case, you’d want:

$1,500 × 12 months = $18,000 for one year
$1,500 × 24 months = $36,000 for two years

So, you’d want $18,000–$36,000 in your cash bucket, depending on how conservative you want to be.

When to Use Bucket 1

Any time you need cash to cover your monthly living expenses, Bucket 1 is your go-to source.

By using this cash bucket:

You avoid tapping into stocks during a market dip.
You protect your other buckets and give them time to rebound.
You simplify your monthly withdrawals, making budgeting easy and stress-free.

It’s especially important during volatile markets, when panic-selling can hurt your long-term returns. Bucket 1 keeps you calm and in control.

How to Refill Bucket 1

Once a year—or as needed—you’ll want to replenish Bucket 1 using funds from Bucket 2 (your income-producing assets).

Here’s how it works:

If the markets are doing well, you may also draw from Bucket 3 (growth).
If markets are down, just refill from Bucket 2 and let Bucket 3 recover.
If your spending needs change, adjust the amount accordingly.

You can think of it like topping off your gas tank. Once it gets low, you refill—preferably when conditions are right.

Why This Bucket Is So Important

When retirees run into trouble, it’s often because they don’t have enough set aside in a safe, liquid account. They’re forced to sell investments at a loss, or they panic during market drops.

Bucket 1 gives you breathing room.

It buys you time to think clearly. It helps you avoid emotional decisions. And it ensures that even during the worst market downturns, your lifestyle doesn’t have to change.

A Quick Real-Life Example

Janet, a recently retired schoolteacher, wanted to avoid worrying about the stock market. She set aside $50,000 in Bucket 1—enough for about 18 months of expenses.

In the spring of 2020, when the market plunged, she didn’t touch her investment portfolio. She simply drew from her cash bucket each month.

By the time she needed to refill it, the markets had mostly recovered—and her growth investments had bounced back. Janet’s retirement income plan never skipped a beat.

What’s Next?

Now that you’ve got a solid foundation with Bucket 1, it’s time to move to Bucket 2—the engine that keeps your cash bucket full and your income flowing.

Let’s look at how to build a strong, stable income bucket for the next 3 to 7 years of your retirement.

Chapter 3: Bucket 2 – Income for the Medium Term (3–7 Years)

If Bucket 1 is your short-term safety net, Bucket 2 is your retirement income engine. It’s the bridge between your immediate cash needs and your long-term growth investments—and it plays a crucial role in helping you maintain a steady lifestyle throughout retirement.

Think of this bucket as your monthly paycheck generator. It’s designed to refill Bucket 1 regularly, while also giving you some income stability for the next several years.

What Is Bucket 2 For?

Bucket 2 covers your expenses for the medium term—typically 3 to 7 years into retirement. The goal is to:

Provide reliable income to replenish your cash bucket (Bucket 1),
Protect your principal from extreme market volatility, and
Avoid the need to sell growth investments too early.

This bucket strikes a balance. It’s not as conservative as Bucket 1, but not as growth-focused or risky as Bucket 3. Think of it as the “just right” zone for income-focused retirees.

What Goes in Bucket 2?

You want investments here that offer steady, predictable income and moderate risk. These investments aren’t totally risk-free, but they’re much more stable than stocks.

Here are some smart choices:

Bond ladders
These are portfolios of bonds with staggered maturity dates. As each bond matures, you get your principal back, along with regular interest payments. A 5-year ladder could have one bond maturing each year, helping you refill Bucket 1 in a predictable way.
Dividend-paying ETFs
Exchange-traded funds focused on companies with a track record of paying dividends can offer solid income with broad diversification. Look for ETFs that focus on quality and stability.
Preferred stocks
These hybrid investments offer fixed dividends, like bonds, but they’re issued by corporations. Many retirees love preferreds for their high income and relatively steady performance.
Conservative REITs (Real Estate Investment Trusts)
REITs can offer attractive income streams from real estate holdings like apartments, warehouses, or healthcare facilities. Stick with high-quality REITs that focus on stable sectors.
Short- and intermediate-term bond funds
These offer broader diversification than individual bonds and can be tailored to match your income needs and risk tolerance.

How Much Risk Should You Take?

The goal with Bucket 2 is to generate income without exposing yourself to big losses. That means sticking with investments that:

Pay consistent interest or dividends,
Have relatively low volatility,
And aren’t too sensitive to rising interest rates or inflation.

You’re looking for dependable—not dazzling—returns. You’re not chasing the hottest stocks or the highest yields. You’re building a reliable income machine.

Replenishing Bucket 1

The most important job of Bucket 2 is to refill your cash bucket each year. Here’s how that works in practice:

At the beginning of each year, you look at your spending needs.
You draw income (dividends, bond interest, maturing bonds) from Bucket 2.
You transfer that income into Bucket 1 to cover the next 6–12 months of expenses.

This regular refilling process is the heart of the bucket strategy—it lets you leave your long-term investments alone while still having income to live on.

If there’s a market downturn, you can pause withdrawals from Bucket 3 and rely more heavily on Bucket 2, giving your growth investments time to recover.

A Real-Life Example: Bob’s Bond Ladder

Bob is a 72-year-old retiree with a total portfolio of $500,000. He’s already got $40,000 set aside in Bucket 1 for short-term expenses.

To build Bucket 2, Bob invests $200,000 in a 5-year bond ladder, with $40,000 maturing each year. He also adds $50,000 into a dividend ETF that pays a 4% yield, and $10,000 into a conservative healthcare REIT.

Each year:

A bond matures and gives him $40,000 in principal,
His dividend ETF pays out $2,000 annually,
His REIT gives him another $400 in income.

Bob uses this money to keep Bucket 1 topped up—no stress, no surprises.

Tips for Success With Bucket 2

Diversify your income sources to reduce risk and keep income flowing even if one asset type underperforms.
Avoid chasing yield. High yields often come with high risk—stick with quality investments.
Consider tax implications. Municipal bonds might be a good choice for taxable accounts.
Review annually. Check your Bucket 2 investments once a year to see if they still match your income needs and risk comfort level.

The Payoff: Confidence

When you know your income for the next 3 to 7 years is secure, you feel more relaxed. You’re not at the mercy of stock market headlines. You’re not worried about needing to “make a move” with your investments.

You’ve got a plan—and it’s working for you.

Coming Up Next

In the next chapter, we’ll explore Bucket 3—your long-term growth bucket. This is where you fight inflation, grow your money, and help ensure your retirement funds last as long as you do.

Let’s talk about how to invest for the future—without losing sleep today.

Chapter 4: Bucket 3 – Growth for the Long Term (8+ Years)

If Buckets 1 and 2 are about income and security, Bucket 3 is all about the future. It’s the part of your retirement plan designed to grow your money and make sure you stay ahead of inflation—so you don’t just survive retirement, but truly enjoy it for decades.

Many retirees are hesitant to invest in stocks once they stop working. That’s understandable—no one wants to lose money when they’re no longer earning a paycheck. But without growth, even a well-padded retirement plan can shrink faster than you expect.

That’s where Bucket 3 comes in. This is where you position part of your portfolio for long-term gains, while still keeping your near-term needs safe in the other two buckets.

What Is Bucket 3 For?

Bucket 3 holds the money you won’t need for 8 years or more. Because of this long time horizon, you can afford to invest more aggressively here—weathering market ups and downs in exchange for better long-term returns.

Its primary goals are:

Growth: Beat inflation over time.
Replenishment: Refill Bucket 2 down the road as you spend it.
Longevity: Help your money last 20–30+ years into retirement.

This bucket helps make sure your nest egg continues to grow even after you stop working.

What Goes in Bucket 3?

Because this is your long-term bucket, you can invest in growth-oriented assets that have higher potential returns but also more short-term volatility.

Here are smart picks for retirees:

Dividend growth stocks
These are shares of companies that not only pay dividends but increase them over time. Think of household names like Johnson & Johnson or Procter & Gamble. These stocks give you both growth and rising income.
Equity index funds or ETFs
Broad-based funds like the S&P 500 or total market ETFs are excellent for long-term growth. They offer diversification, low fees, and exposure to companies that can grow over time.
Asset managers
Companies like Blackstone or Brookfield invest in infrastructure, private equity, and real estate—and often return strong long-term gains while paying dividends.
International stocks
Including global companies can add diversification and opportunities for growth, especially in emerging markets.
REITs with long-term potential
Some real estate investment trusts (like data center or logistics REITs) may offer both income and capital appreciation.

Avoid overly risky speculative stocks, crypto, or anything that could wipe out large amounts of capital quickly. You’re taking calculated, long-term risk here—not gambling.

Why Risk Is Okay in Bucket 3

The key to Bucket 3 is time. You don’t need to touch this money for many years—possibly even a decade. That gives it the breathing room it needs to recover from market dips and keep growing.

Here’s what history tells us:

Over any 10-year period, the U.S. stock market has almost always delivered positive returns.
Longer timeframes reduce the risk of loss and increase your chance of solid gains.

So while short-term volatility may feel unsettling, you’re not spending this money any time soon. That means you can afford to be patient—and let compounding do its work.

Real-Life Example: Susan’s Growth Portfolio

Susan, age 67, has $750,000 saved for retirement. She uses the bucket strategy to give herself peace of mind.

Bucket 1: $50,000 in savings and CDs (about 18 months of expenses)
Bucket 2: $250,000 in bond ladders and dividend ETFs
Bucket 3: $450,000 in growth investments

Her Bucket 3 includes:

$200,000 in a low-cost S&P 500 index fund
$100,000 in a global dividend growth ETF
$75,000 in a REIT that owns data centers
$75,000 in two blue-chip dividend growth stocks

Susan doesn’t check this bucket daily. In fact, she rarely looks at it. Her income needs are met by Buckets 1 and 2. Meanwhile, Bucket 3 quietly grows, ready to support her 10 or 15 years down the line.

How to Manage Bucket 3

Let it grow. Don’t withdraw from this bucket unless it’s time to refill Bucket 2.
Review annually. Check for major changes or underperformance, but avoid constant tweaking.
Stay diversified. Use broad-based funds and a mix of sectors or geographies.
Stay calm during downturns. Remember: this money isn’t for today—it’s for the future.

The Power of Compounding

One of the most powerful forces in investing is compounding—earning gains on your gains. The longer you let investments grow untouched, the more they can work for you.

Even modest returns—say 6%–7% per year—can double your money in 10–12 years. That’s why having a dedicated growth bucket is essential if you want your money to outlast your retirement.

Up Next: Putting It All Together

Now that you understand all three buckets, it’s time to learn how to build your own plan, choose allocations, and maintain your strategy through different market conditions.

In the next chapter, we’ll walk you through how to set up your own personal bucket strategy, with simple steps and practical examples.

Let’s make your retirement plan real—and make it last.

Chapter 5: Setting Up and Maintaining Your Buckets

By now, you understand what each bucket is for:

Bucket 1 provides cash for the short term.
Bucket 2 generates steady income for the medium term.
Bucket 3 grows your money for the long term.

Now it’s time to put it all together and build your own personalized bucket strategy. The good news? You don’t need a financial advisor or a complicated spreadsheet to do this. All you need is a clear picture of your income needs, your savings, and a little common sense.

Step 1: Estimate Your Income Gap

Before you can allocate money to each bucket, you need to figure out how much income your investments will need to provide.

Start by asking:

What are my average monthly living expenses in retirement?
What is my guaranteed monthly income from Social Security, pensions, or annuities?
What’s the gap that my investments need to fill?

Example:

Expenses: $4,000/month
Social Security: $2,500/month
Income gap: $1,500/month, or $18,000/year

This $18,000 will need to come from your buckets—starting with Bucket 1.

Step 2: Choose Your Bucket Allocations

There’s no one-size-fits-all formula, but here are general guidelines that work for many retirees:

Bucket 1 (Cash): 1–2 years of income needs
- For our example: $18,000–$36,000
- Great for peace of mind and handling short-term needs
Bucket 2 (Income): 3–7 years of income needs
- 5 years × $18,000 = $90,000
- May include dividend ETFs, bonds, and REITs
Bucket 3 (Growth): Everything else
- The remaining balance can be invested for long-term growth

If your portfolio is $500,000, the breakdown might look like:

Bucket 1: $36,000
Bucket 2: $100,000
Bucket 3: $364,000

The key is flexibility. You can adjust based on your age, health, and risk tolerance.

Step 3: Choose the Right Investments for Each Bucket

Keep it simple and focus on investments with a clear role in your plan.

Bucket 1:

High-yield savings account
Money market fund
Short-term CDs
U.S. Treasury bills

Bucket 2:

Bond ladder (3–5 years)
Dividend-paying ETFs or stocks
Preferred shares
Conservative REITs

Bucket 3:

Low-cost stock index funds (e.g., S&P 500 ETF)
Dividend growth stocks
Asset managers (e.g., Brookfield, Blackstone)
International equity funds

You don’t need to pick dozens of investments. A well-chosen handful in each bucket can do the job.

Step 4: Refill and Rebalance the Buckets

Each year, you’ll need to refill Bucket 1 with income from Bucket 2—or, if the market is strong, by taking some profits from Bucket 3.

Here’s how the process works:

Spend from Bucket 1 during the year.
At the end of the year, top it off using dividends, bond income, or matured assets from Bucket 2.
If needed—and only if markets are doing well—draw from Bucket 3 to refill Bucket 2.

This approach helps you avoid selling growth assets during a downturn. Instead, you let Bucket 3 grow and only tap it when the timing is right.

Step 5: Keep It Simple

Don’t overcomplicate your buckets. The whole idea is to make your financial life easier, not harder.

Here are some tips to stay on track:

Review your buckets once or twice a year. No need to obsess.
Use automatic transfers where possible to reduce hands-on work.
Write down your plan or work with a trusted professional to help keep it organized.
Be flexible. If your expenses change or the market shifts, you can adjust.

Real-Life Snapshot: Carol and Dan’s Setup

Carol and Dan, ages 68 and 70, have $800,000 in savings and live modestly on $3,000/month. With Social Security covering $2,000/month, they need $1,000/month from their investments.

They decide on this allocation:

Bucket 1: $24,000 (2 years × $1,000/month)
Bucket 2: $120,000 in bond ladders, preferred stocks, and a dividend ETF
Bucket 3: $656,000 in diversified growth investments

Each January, they check their spending, top off Bucket 1, and enjoy their year with confidence.

You’re in Control

The bucket strategy doesn’t lock you into a rigid formula—it gives you a flexible system that you can adjust as life changes.

Whether you’re 60, 70, or 80, this strategy adapts with you. It’s not about maximizing returns. It’s about minimizing worry and making your money last.

Coming Up Next: Your Bucket Plan in Action

You now know how the buckets work and how to build them. In the final chapter, we’ll help you bring everything together with real-world examples, step-by-step guidance, and encouragement to get started today.

Let’s turn your bucket strategy into reality—so you can retire with confidence and sleep well at night.

Chapter 6: Your Bucket Plan in Action

Now that you understand how each of the three buckets works—and how they fit together—let’s bring it all home with a step-by-step guide to building your own bucket strategy.

Whether you’re newly retired or well into your retirement years, this system can give you the structure and confidence to enjoy life without money worries.

Step-by-Step: Build Your Personal Bucket Plan

Here’s a simple roadmap to follow:

Calculate your monthly income gap.
Subtract guaranteed income (Social Security, pension, etc.) from your monthly expenses.
Decide how many years of spending to cover in Bucket 1.
Most retirees start with 1 to 2 years of expenses in cash.
Allocate 3–7 years of income to Bucket 2.
Fill this bucket with income-producing investments like bonds or dividend ETFs.
Invest the rest in Bucket 3 for long-term growth.
Choose diversified growth assets like stock funds or dividend growth stocks.
Withdraw from Bucket 1 each month.
Use this cash to cover living expenses, and enjoy peace of mind.
Replenish Bucket 1 each year
Use income from Bucket 2—or, if the market is doing well, take profits from Bucket 3.
Review once or twice a year.
Adjust as needed to reflect changes in spending, market conditions, or your goals.

Sample Plans for Different Retirees

Conservative Investor with $300,000:

Bucket 1: $30,000 in savings accounts
Bucket 2: $100,000 in a 5-year bond ladder and dividend ETF
Bucket 3: $170,000 in a low-cost balanced fund

Moderate Investor with $500,000:

Bucket 1: $36,000 in money market funds
Bucket 2: $120,000 in dividend ETFs, preferred stocks, and REITs
Bucket 3: $344,000 in U.S. and global equity funds

Growth-Oriented Investor with $800,000 and a pension:

Bucket 1: $24,000 in short-term CDs
Bucket 2: $100,000 in municipal bonds and dividend income fund
Bucket 3: $676,000 in stock index funds and dividend growth stocks

These examples show how flexible the bucket system can be, no matter your risk comfort or portfolio size.

Why This Strategy Works in Bull and Bear Markets

Markets go up. Markets go down. But when your short- and mid-term income is covered, you don’t have to panic. You’re not forced to sell your investments at a loss during a downturn. You’ve got time to wait for a recovery.

And when the markets are doing well? You can top off your buckets and let the gains roll forward.

The result is a balanced approach that reduces stress, avoids emotional decisions, and gives your portfolio the staying power it needs.

A Final Word of Encouragement

The bucket strategy gives you more than just a structure—it gives you peace of mind. You’ll know where your money is, what it’s for, and how it supports your life.

Even better, you don’t need to time the market or chase high returns. You simply follow a steady, proven system that adapts to your life.

If you want to dive deeper into the details, I’ve written a full-length guidebook that expands on everything in this mini-book:

The Bucket Strategy for Retirees: The Proven System to Avoid Running Out of Money in Retirement
Available now on Amazon in paperback and eBook formats, this in-depth guide includes advanced tips, asset allocation options, and real-life stories to help you fine-tune your retirement strategy and sleep well at night.

Disclaimer

This guide is for educational purposes only and is not intended as financial advice. Every person’s financial situation is different. Before making any investment decisions, please consult with a qualified financial advisor or tax professional who can assess your unique needs and goals. The author and publisher assume no responsibility or liability for individual actions based on the content of this guide.