What is the Bucket Strategy for Retirement Income?

Retirement should be a time of renewed purpose, joy, and steady confidence, not a season dominated by financial stress or fear about running out of money. Yet for many retirees, the shift from building a nest egg to distributing it can feel overwhelming. You spend decades saving diligently, only to realize that turning those savings into stable, predictable income is an entirely new challenge.

The bucket strategy offers a simple, disciplined method to help you navigate that transition with clarity. By organizing your assets into time-based “buckets,” this approach creates a structured plan that meets today’s needs while preserving tomorrow’s opportunities.

Why Retirement Income Planning Feels Overwhelming

Many retirees share the same core concerns:

• “How do I make my savings last?”

• “What happens if the market drops right when I need to start withdrawing?”

• “How do I handle rising costs over time?”

This anxiety often intensifies during periods of market volatility. After decades of living below your means and saving, it can be emotionally jarring to start withdrawing from accounts you’ve faithfully built up and avoided drawing from. What’s needed is not just an investment plan, but an income framework that brings order, stability, and confidence. That’s where the bucket strategy shines.

What Is the “Bucket Strategy?”

The bucket strategy divides your retirement assets into separate segments based on time horizon and purpose. Each bucket plays a distinct role in supporting your retirement lifestyle:

Bucket 1: Immediate Needs (Years 1-2)

This bucket is designed to cover your near-term expenses—think monthly living costs, healthcare premiums, travel, groceries, and giving over the next 1-2 years. The goal for this bucket is stability of principal. It should shield you from selling investments at a loss during a downturn in the stock or bond markets. Generally, it should be invested in cash or money market funds, short-term treasury bills, and similar investments.

Bucket 2: Mid-Term Income (Years 3–10)

This bucket replenishes Bucket 1 over time and is invested for moderate growth with lower volatility. This acts as the bridge between your cash reserves and your long-term growth engine. Typically, it should be invested in intermediate-term bonds, certificates of deposit, income producing real estate funds, commodities, and dividend paying value stocks.

Bucket 3: Long-Term Growth (Years 10+)

This bucket fuels the later decades of retirement and combats inflation. Since this bucket has a lengthy time horizon, it can weather market fluctuations and recover from downturns. Typically, this bucket can be invested in growth stocks, real estate, and private equity. Gains from this bucket can also be trimmed along the way to replenish the other 2 buckets.

Why the Bucket Strategy Works

1. Psychological Benefits

One of the most powerful advantages of this strategy is emotional stability. In my 2+ decades of working with retirees I have found that when markets swing sharply, retirees often feel tempted to make reactionary moves. However, knowing that there is a “war chest” of up to 10 years of income needs (Buckets 1 & 2) helps them feel more secure.  For example, during the financial crisis of 2007-2009, the US stock market dropped almost 50% and then took 5 years to recover. By having that “war chest,” retirees following this bucket strategy would not have to sell stocks for income during that inopportune time, thus allowing the stocks to recover.

2. Financial Advantages

The bucket strategy helps protect retirees from sequence of returns risk, which occurs when negative market years happen early in retirement and can have a negative effect on the longevity of the portfolio. Because you’re drawing income from Bucket 1 instead of selling long-term investments, your growth assets have time to recover. Meanwhile, Bucket 3 continues to grow, strengthening your long-term plan.

How to Implement the Bucket Strategy

Step 1: Define Your Annual Spending Needs

Start by calculating how much income you need each year to live the lifestyle you want to live during retirement. Perhaps you want to replace your paycheck. Perhaps you intend to travel more often than you currently do so you may need more.

From there, deduct Social Security, pensions, or other guaranteed income. The gap determines how much your investment portfolio must provide.

Step 2: Allocate Assets into the Three Buckets

A typical allocation might look like:

• Bucket 1 (1-2 years): 10–20% of portfolio

• Bucket 2 (3–10 years): 30–50%

• Bucket 3 (10+ years): 30–50%

Your allocation may differ based on risk tolerance and income needs, but the time-based structure remains consistent.

It is also important to be mindful of tax treatment; many retirees have a mix of taxable, tax-deferred, and tax-free accounts. You should determine, together with your financial planner and tax advisor, the ideal sequence of withdrawal strategy for your specific situation and goals.

Step 3: Establish a Refill System

Periodically rebalance when necessary:

• Have interest and dividends from all investments be paid into a cash sweep to replenish Bucket 1.

• When markets are up: harvest gains from Bucket 3 and Bucket 2 to refill your cash for the next year.

• When markets are down: avoid selling from Bucket 3. Use Bucket 2 cautiously and let growth assets recover.

This rule-based approach takes emotion out of decision-making.

Step 4: Reassess Regularly

Review your buckets at least semi-annually—or whenever your spending, risk tolerance, or income sources change. Adjustments ensure the buckets remain aligned with your life and goals.

Advantages Over Pro-Rata Withdrawals

Many retirees follow a pro-rata withdrawal method, taking a little from each account or investment every year. While simple, it lacks structure and can force investors to sell growth assets at the wrong time.

The bucket strategy offers:

• Better alignment of investment risk with time horizon

• Clearer visibility into year-to-year income

• A built-in system for staying disciplined

• Lower emotional stress during downturns

It’s a more intentional and sustainable path.

Conclusion: A Steady Path for a Faithful Retirement

The bucket strategy brings clarity, purpose, and peace to the retirement journey. It offers structure in uncertain markets and empowers retirees to spend intentionally while protecting long-term potential.

If you’d like help designing a personalized bucket strategy or reviewing whether your current approach aligns with your goals, we would be honored to help guide you. Let’s talk:

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