Planning for retirement can feel like navigating a financial maze, with concerns about longevity, market volatility and inflation often clouding the path forward. Enter the retirement bucket strategy, a practical and increasingly popular approach to managing your retirement savings. Also known as the “3 bucket strategy,” this method involves dividing your assets into separate “buckets,” each designated for different time horizons and financial goals. By balancing liquidity and growth, the strategy provides a structured framework to ensure your money lasts while addressing both short-term needs and long-term aspirations.

Consider working with a financial advisor as you create or modify your retirement plans.

What Is the Retirement Bucket Strategy?

The retirement bucket strategy is an investment approach that segregates your sources of income into three buckets. Each of these buckets has a defined purpose based on when the money will be needed: immediate (short-term), intermediate and long-term.

The idea behind this strategy is that you’ll have access to cash in the short term, so you won’t have to worry about fluctuations in the stock market. In theory, you shouldn’t have to sell your investments during a down market to fund your annual withdrawals. The buckets are refilled by interest income, dividends and the performance of your investments.

How to Use the Retirement Bucket Strategy

In order to get the most out of the retirement bucket strategy, you’ll need to follow specific plans for each bucket. Here’s how to manage each bucket of money and determine how much to allocate to each.

The Immediate Bucket

Cash and other liquid investments are in the immediate, or short-term, bucket. These investments include short-duration CDs, U.S. T-bills, high-yield savings accounts and other similar assets. You’ll fill this bucket with liquid investments, meaning they’re easily converted into cash. While earning interest on this money is appealing, the main focus is on reducing risk and ensuring that the money is there whenever you need it.

Ideally, you’ll want to hold enough cash in the immediate bucket to pay for up to two years of expenses. So if you plan on spending $50,000 per year in retirement, then you’ll want to try and reach $100,000 in this bucket.

The Intermediate Bucket

This middle bucket covers expenses from Year 3 through Year 10 of retirement. Money in the intermediate bucket should continue to grow to keep pace with inflation. However, you’ll want to avoid investing in high-risk assets.

Common intermediate investments include longer-maturity bonds and CDs, preferred stocks, convertible bonds, growth and income funds, utility stocks, REITs and more. Working with a financial professional can help you determine the investments that will meet your investing goals.

The Long-Term Bucket

Long-term investments are those that mimic historical stock market returns. These assets grow your nest egg more than inflation, while also allowing you to refill your immediate and intermediate buckets. Long-term bucket assets are invested in riskier assets that may be volatile in the short-term but have growth potential over 10 years or more.

With the retirement bucket strategy, your long-term bucket should have a diversified portfolio of stocks and related assets. It should be allocated across domestic and international investments ranging from small-cap to large-cap stocks.

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Pros and Cons of the Retirement Bucket Strategy

There’s no one-size-fits-all retirement strategy. Furthermore, a strategy that works well early in retirement might be less satisfactory later on. So, before you allocate your money according to the retirement bucket strategy, weigh the pros and cons of this approach.

One of the pros of the bucket strategy is that it helps to control emotions during stock market volatility. During down years of the stock market, you don’t have to worry about selling at a loss. Your annual withdrawals are made from the immediate bucket. This bucket holds relatively safe, highly liquid assets like savings accounts, money market accounts, CDs and short-term Treasury bonds. Another advantage is that this strategy provides a road map that removes some of the guesswork in planning retirement income.

This strategy may be too conservative for some retirees. If you hold too much in your immediate and intermediate buckets, your long-term growth bucket won’t out-earn your withdrawals and inflation. This could lead to a shrinking income as you age. Another potential con of the bucket strategy is that it ignores asset allocation. One of the core tenets of investing is diversification through asset allocation. This strategy doesn’t define how to invest each bucket or account for rebalancing during good or bad years.

How to Maintain Your Retirement Bucket Strategy

While the retirement bucket strategy tells you where to hold your money, it isn’t a complete strategy. It doesn’t mention what types of investments to hold, the rate at which you should withdraw them or how to rebalance them.

Let’s say that you have your first two buckets filled. The stock market has grown considerably, shifting your portfolio toward high-risk stocks. The retirement bucket strategy doesn’t advise selling some of the long-term to reduce your risk and capture some of those gains. For this reason, it’s best to layer a rebalancing strategy on top of the bucket strategy.

Example of the Retirement Bucket Strategy in Action

Imagine you are retiring at age 65 with $1 million in savings. To implement the retirement bucket strategy, you allocate your assets into three distinct buckets based on your income needs and investment horizon.

Your immediate bucket holds two years’ worth of expenses – around $100,000 – in cash, high-yield savings accounts and short-term Treasury bills. This ensures you have liquidity for everyday costs without needing to sell investments during a market downturn.

Your intermediate bucket is designed to cover years three through 10. You allocate $300,000 to investment-grade bonds, dividend-paying stocks and CDs to generate steady returns while maintaining moderate risk. This bucket replenishes your immediate bucket as needed.

Finally, your long-term bucket holds the remaining $600,000 in a diversified mix of equities, including index funds and growth stocks. Over time, this bucket grows, helping to replenish the other two. During a market upswing, you rebalance by shifting gains from the long-term bucket to your shorter-term buckets, securing future income while keeping your portfolio aligned with your goals.

Alternatives to the Retirement Bucket Strategy

There are several other ways to organize your finances for retirement. An alternative known as the 45% rule calls for your retirement savings to generate about 45% of your pretax, pre-retirement income each year, with Social Security benefits covering the rest of your spending needs. That means that the average retiree will need to replace between 55% and 80% of their pre-retirement, pretax income to maintain their current lifestyle.

Another alternative retirement strategy is systematic withdrawal. This type of payout plan is usually generated by selling stocks or other securities within your portfolio. These securities can be sold in proportion to the entirety of your investment portfolio, which keeps your asset allocation on target. Just keep in mind that the payouts don’t adjust based on the status of the market or an investment portfolio’s rate of return.

Ultimately, you may want to talk to a financial advisor to know for sure what the best strategy is for your portfolio. Every decision like this requires a unique look at your own personal finances.

Bottom Line

The retirement bucket strategy recommends creating three buckets for your money – short-term, intermediate and long-term. This approach withstands short-term dips in the market to prevent investors from selling low to cover monthly expenses. The strategy does have some shortcomings, which require the layering of additional strategies to reduce risk.

Retirement Planning Tips

Creating a well-defined plan for retirement income often involves receiving expert advice. A financial advisor can provide impartial insight on how to invest your portfolio to meet your retirement income needs. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
There are numerous strategies that retirees use to create retirement income. To provide the most flexibility, it helps to build a larger nest egg. Our investment calculator allows investors to adjust multiple factors to forecast how big their nest egg will grow. These factors include starting balance, annual contributions, annual returns and timeframe.