Bucket Strategy

A typical plan uses three buckets. Bucket 1 holds one to two years of withdrawals in cash or cash equivalents and pays the bills. Bucket 2 holds the next several years, often through about year 10, in high-quality bonds that earn more than cash but swing far less than stocks. Bucket 3 holds everything else in a diversified stock portfolio for growth over the rest of retirement. Two-bucket versions merge the bond and stock pools.

The system runs on refill rules. After a good year for stocks, you sell some of Bucket 3 to top up the nearer buckets. After a bad year you leave stocks alone and keep spending from cash and bonds, giving the market time to recover. That rule targets sequence-of-returns risk, the lasting damage done when losses arrive early in retirement while money is flowing out.

Credit for the idea usually goes to financial planner Harold Evensky, who has argued that buckets are built for real people rather than perfectly rational investors. Seeing two years of spending set aside makes a bear market easier to sit through and lowers the risk of panicking into cash at the bottom.

Start with the withdrawal the portfolio actually has to supply, not your total budget. If you spend $70,000 a year and Social Security and a pension cover $20,000, the portfolio’s job is $50,000. Multiply that by the years each bucket covers, and whatever is left goes into stocks.

Where each bucket lives matters as much as its size. Checking, savings, money market deposit accounts and CDs at a bank are FDIC-insured up to $250,000 per depositor, per bank, for each ownership category. Money market mutual funds and Treasury bills are not bank deposits, so FDIC insurance does not apply to them. Treasury bills run from 4 to 52 weeks, which suits a cash bucket. Bucket 2 is often a bond ladder or a ladder of TIPS, whose principal rises with inflation, so each year’s money matures when it is needed.

Buckets also cut across account types: a refill can be a sale inside an IRA, a withdrawal from it, or a required minimum distribution you had to take anyway. They are not the three tax buckets of tax diversification, which sort savings into taxable, tax-deferred and Roth accounts. Which account pays each year is a separate question, answered by a tax-efficient withdrawal strategy.

Buckets can look safer than they are, because the cash bucket is still part of your asset allocation. The three buckets in the example below add up to an ordinary 50/40/10 portfolio, and it behaves like one whatever the buckets are called.

The best-known test is Javier Estrada’s study, published in The Journal of Investing in 2019. Using 115 years of returns (1900–2014) from 21 countries, he compared bucket rules that kept two years of inflation-adjusted withdrawals in Treasury bills with simple stock-and-bill mixes rebalanced every year. In U.S. data the best static mixes did better on all four measures he used, and static mixes also came out ahead in his cross-country averages. In U.S. data covering 86 rolling 30-year retirements with a 4% initial withdrawal, a static 70/30 or 50/50 mix ran out of money in 1.2% of periods. A popular bucket rule failed in 4.7% of periods with two years of cash and 27.9% with five.

The cause is one-way traffic. Most bucket rules sell stocks to refill cash after good years but never buy stocks back after bad ones, so the portfolio drifts toward cash and misses the rebounds that rebalancing captures. Estrada also cites earlier work by Michael Kitces finding that buckets matched static portfolios when the buckets themselves were rebalanced.

A total-return approach holds one target mix, say 50% stocks and 50% bonds and cash, takes each withdrawal from whatever is overweight, and rebalances once a year. A bucket plan that is rebalanced back to fixed proportions is the same portfolio with labels on it. The labels are the point: for many retirees, knowing where the next two years of groceries will come from is what makes holding stocks bearable.

Guardrail-style dynamic spending rules attack the same problem from the other side, trimming withdrawals after losses instead of holding extra cash. The two can be combined.

Most problems come from treating the buckets as separate pots of money rather than one portfolio. Before you start, write down each bucket’s target size, the refill rule and a review date. Then test the plan against a crash in the first two years of retirement, and check the overall stock share the buckets add up to. A plan that works only if stocks recover within two years is a timing bet, not a safety net.