The bucket strategy for retirement, in plain English

The bucket strategy divides your retirement savings by when you'll spend them: a cash bucket for the next year or two, a bond bucket for roughly the next several years, and a stock bucket for everything further out. You live off the cash bucket and refill it from the others, so a market drop doesn't force you to sell stocks at a low price to pay this month's bills.

It's less a new investment plan than a way of organizing the one you have, and many people find it makes the ups and downs easier to live with.

This is general education, not financial advice. The amounts below are made up. How much you keep in each bucket depends on your spending, your other income and how much risk you can live with.

How the three buckets work

Bucket 1: cash for now

This holds about one to two years of what you'll take from savings, in an insured savings account, money market fund or Treasury bills. It's what you spend from, often set up as a monthly "paycheck" into your checking account. Where to keep cash covers the options and the FDIC and NCUA limits.

Bucket 2: bonds for the middle years

This holds roughly the next several years of spending in bonds or bond funds. Bonds usually move less than stocks, so they're there to refill bucket 1 when stocks are down.

Bucket 3: stocks for later

Everything else goes into diversified stock funds. This is the money you won't need for years, so it has time to ride out downturns and grow. Index investing basics covers the low-cost funds many people use.

A made-up example

Priya is made up. She retires with $1,200,000 and needs $48,000 a year from savings (a 4% rate). She sets up:

| Bucket | Holds | Made-up amount | |---|---|---| | 1. Cash | 2 years of withdrawals | $96,000 | | 2. Bonds | about 6 more years | $288,000 | | 3. Stocks | the rest | $816,000 |

Each month she moves $4,000 from bucket 1 into checking. Once a year she refills bucket 1:

• In a good year for stocks, she sells some stocks to top up cash, and maybe bonds too.
• In a bad year for stocks, she leaves stocks alone and refills cash from bonds instead, giving stocks time to recover.

How people refill the buckets

There's no single rule. Common approaches:

• Yearly top-up: once a year, refill bucket 1 back to its target from whichever bucket is ahead.
• From gains only: sell stocks to refill only after a good year; otherwise use bonds.
• Rebalancing: keep an overall mix, such as 60% stocks and 40% bonds and cash, and take withdrawals from whatever is over target. This works much like buckets, with less tracking.

Dividends and interest can flow straight into bucket 1, which cuts down on selling.

How it fits with the 4% rule

The 4% rule answers "how much can I take each year?" The bucket strategy answers "which part of my savings does it come from?" They work together. The research behind the 4% rule assumed a steady mix of stocks and bonds, which is close to what a bucket plan holds overall.

Buckets don't create extra money. A large cash bucket earns less over time than stocks would, so holding too much cash can drag on long-term growth. Many people keep bucket 1 to a year or two for that reason.

Is the bucket strategy right for you?

It often suits you if you'd worry about selling in a downturn, you like seeing your near-term spending set aside, or you're retiring into a falling market.

It may be more than you need if a pension and Social Security cover most of your spending, or you're comfortable with a simple rebalanced mix.

Which accounts to put each bucket in, and which to draw from first for taxes, is its own question. Which account do you spend first? covers it.

Common questions

What is the 3-bucket strategy for retirement?

It splits your savings into three parts by when you'll need them: cash for about the next one to two years of withdrawals, bonds for roughly the next several years, and stocks for the long term. You spend from cash and refill it from the other two.

How much should be in each bucket?

There's no fixed rule. A common setup is one to two years of withdrawals in cash, several more years in bonds, and the rest in stocks. People with a pension or Social Security covering much of their spending often need smaller cash and bond buckets.

How often do you refill the buckets?

Many people refill the cash bucket once a year. After good years for stocks, they sell stocks to top it up; after bad years, they use bonds instead and give stocks time to recover.

Is the bucket strategy better than the 4% rule?

They answer different questions. The 4% rule sets how much you withdraw; the bucket strategy decides where each withdrawal comes from. Many retirees use both together.

What are the downsides of the bucket strategy?

Cash and bonds usually grow less than stocks, so a large cash bucket can slow long-term growth. It also takes a little more tracking than a simple rebalanced mix. Some people find the peace of mind is worth it.

Does the bucket strategy protect against a market crash?

It doesn't stop your investments falling, but it means you don't have to sell stocks at low prices to pay the bills. That gives them time to recover, which is the main way a crash early in retirement does lasting damage.

Next step

See how long your savings would last at your withdrawal rate, including what a rough first few years would do.

Try the withdrawal rate explorer →