Bucket Strategy, Safely Withdraw Your Savings for Retirement Spending

Last time, we discussed how to determine how much of your savings you can withdraw in retirement while ensuring that savings will last as long as you (and your spouse) do.  Now let’s discuss retirement spending – how to manage your withdrawals from savings in retirement.  Whether you have many or few accounts and assets, you need a plan to manage the withdrawal of your assets, converting them to cash, and investing the rest for both income and growth.  One of the first questions you should answer when investing is what is your time horizon, i.e., when will you need your money?  You should use this same principle when getting ready to use your savings.  When you are ready to start using your retirement savings, the answer to when will you need your retirement savings is this.  Your retirement spending will need some of your money now, some within a few years, and some many years from now.  So you should divide your retirement savings into categories that meet each of these time horizons.  This strategy is known as the basket  or bucket strategy. 

Retirement Spending

During the Great Recession and market crash, many recent retirees watched in dismay as their carefully accumulated retirement savings dwindled lower and lower just as they counted on it to last the rest of their lives.  You can avoid this by planning ahead and having enough cash and safe bonds on hand to carry you thru a typical market downturn until your savings have recovered.

Bucket Strategy

The bucket strategy manages this by dividing your savings into multiple categories with your least volatile investments used for your soonest withdrawals and your most aggressive investments used for you latest withdrawals.  This is designed to enable you to spend from safe investments without worrying when volatile investments are doing poorly, even for many years.  In particular, you can avoid the prospect that faced retirees who retired right before or during the Great Recession who saw their retirement savings plunge right before they needed them.  I recommend the bucket strategy that uses three buckets.


Bucket Time horizon Goal Investments
Bucket One 0-2 years Preserve savings and spend from this basket. All in savings accounts, CDs, money market funds, or short-term bonds or Treasuries.
Bucket Two 3-5 years Preserve savings, generate investment income, and refill basket one when basket three is underperforming. Safe income producing investments.  Mostly short/intermediate bonds with some in higher yield bonds, high quality dividend paying stocks, balanced funds, or income/dividend funds.
Bucket Three > 5 years Invest for growth and refill buckets 1 and 2 when investment performance is doing well.  Avoid using when investments are down. Aggressive investments including growth and income.  Asset allocation mostly in stocks and volatile bonds.  For example, the classic 60/40 allocation has proven to provide nice growth with only half the volatility of all stocks.  You can trim the stock portion as you grown older, but this bucket can always have a big percentage in stocks because you are already diversified with less risky investments in buckets 2 and 3.


Bucket 1 will contain enough cash to last you for the next year and emergencies.  If you want to be cautious, it can include two years.  We saw during the Great Recession that cash can earn practically nothing for extended periods, so some people choose to keep only one year of cash here or put the second year of cash in short term or government bonds.

Bucket 2 can contain your income producing assets.  Leave it alone except to:

  • Refill bucket 1 with its income from dividends and interest.
  • Refill bucket 1 as needed by selling investments whenever bucket 3 is unavailable for use because its investments are doing poorly from a down market.

Refill bucket 2 when bucket 3 investments are again doing well.

Bucket 3 contains your aggressive investments for both growth and income, especially stocks and volatile, high-yield bonds.  Routinely refill bucket 1 with dividend and yield income from bucket 3.  Whenever bucket 3 investments are doing well, refill buckets 1 and 2 by selling assets as needed.  Whenever bucket 3 investments are doing poorly because of a down market, let bucket 3 recover by using bucket 2 assets instead.  Don’t forget to rebalance bucket 3 around once per year and follow the other investing principles I cover in “investing”.

Refilling Your Buckets

You have flexibility about how to refill your bucket 1 each year including:

  • Using dividend and interest income from buckets 2 and 3 to automatically refill it. Note that this alone is unlikely to be enough, especially during extended periods of low interest rates as we saw after the Great Recession.
  • Rebalancing within or between the other buckets and moving cash to bucket 1 by selling assets performing well.
  • Selling assets from either bucket 3 when it’s doing well, or bucket 2 when you need to preserve an underperforming bucket 3.

The key to the three bucket strategy is that you have at least 5 years of low-risk savings to live on regardless of what is happening to your aggressive investments in bucket 3.  Even severe market downturns usually recover within 5 years, so you rarely should need to touch your bucket 3 investments during a time when they are shrinking.  This should give you the peace of mind to ride out any downturns without affecting your standard of living or panic-selling your stocks at a loss.  Note that this could mean not refilling bucket 2 for up to five years if a down market lasted that long and prevented you from tapping bucket 3.  During that five years you would be drawing down bucket 1, refilling from bucket 2, and letting bucket 3 recover.

Advantages of the Bucket Strategy

You can find many variations of the bucket strategy, but I recommend this one because it provides the best combination of:

  • Safety – You have up to five year of safe investments, enough to outlast most market downturns.
  • Returns – Only 1-2 years of expenses are in super safe cash earning a pittance, while most of your 6+ year investments can remain in aggressive growth and income investments like stocks.
  • Flexibility – You can use either bucket 2 or 3 to refill your cash coffers depending upon market conditions at the time, so you greatly increase the odds of selling growing assets rather than shrinking assets.

Now you know a safe strategy you can use to divide your savings and investments into safe, moderate risk/reward, and high risk/reward investments based upon when you will need your money.

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