How many years should the first bucket cover?
Descriptions often use one to three years of spending, but there is no single right answer. It depends on your other income and comfort level.
Market and longevity risks
What Is the Bucket Strategy for Retirement Income?
The bucket strategy is a way of organizing retirement money by when you will need it. A near-term bucket holds money for the next few years of spending in safer, stable places. Later buckets hold money meant for future years. The idea is to avoid selling long-term holdings during a market drop to pay this year's bills, which helps address sequence of returns risk.
Written and reviewed by Dan Hopwood, Retirement Income Specialist · Retirement Income Knowledge Center
How the buckets are usually described
- Bucket 1 — now: money for roughly the next one to three years of spending, kept stable and easy to reach.
- Bucket 2 — soon: money for the middle years, meant to be more stable than long-term money.
- Bucket 3 — later: money not needed for many years, which has more time to recover from ups and downs.
An example
Illustrative $600,000 in savings needing $30,000 per year
- Bucket 1 (about 2 years)
- $60,000
- Bucket 2 (about years 3–8)
- $180,000
- Bucket 3 (later years)
- $360,000
Illustration only. The sizes are made up to show the idea and are not a recommendation for how to divide your money.
Why people use it
Knowing that the next few years of bills are set aside can make it easier to stay calm during a market drop. It also makes the link between savings and monthly spending easy to see.
Limitations
Buckets need to be refilled over time, and deciding when to refill takes judgment. The strategy does not guarantee income for life or protect against living a very long time. Some retirees use guaranteed income, such as Social Security or annuity income, to cover essential bills and keep buckets for the rest.
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Common questions
Is the bucket strategy a guarantee?
No. It is an organizing method. Only contractual sources such as Social Security, pensions or annuities provide guaranteed lifetime income.
How does it relate to sequence of returns risk?
Sequence risk comes from selling during early losses. Buckets try to reduce how much you must sell at bad times.
What goes in each bucket?
Typically the first bucket holds cash or stable money for near-term spending, a middle bucket holds more conservative assets for the next several years, and a later bucket is for longer-term needs. Some people use steady income sources, like an annuity, to fill part of the near-term role. The specifics depend on your situation.
How often should I refill the buckets?
Many people review once a year and refill the near-term bucket from the others when conditions allow. Refilling after a strong year and pausing after a downturn is a common approach. There is no single required schedule.
Is a cash reserve the same as a bucket strategy?
A cash reserve is usually the first part of a bucket strategy, but not the whole thing. The full approach also plans how later buckets refill it. Either can reduce the need to sell after a market drop.
What happens to the buckets in a long bear market?
The cash bucket keeps paying while you wait, but if a downturn lasts longer than it covers, you may have to draw from other buckets anyway. That is why the size of the first bucket and steady income sources matter.
This page is educational and general in nature. RetirementLeverage™ and Retirement Planning Store, Inc. do not provide individualized investment, securities, tax, or legal advice; please consult a qualified tax professional or attorney about your own situation. Insurance products and services may not be available in every state, and any guarantees are subject to the financial strength and claims-paying ability of the issuing insurance company.