The Bucket Approach To Retirement Allocation


How Much Money Goes In Each Income Bucket

3 Bucket Theory to Retirement: Asset Allocation Strategies & Tips

When you begin using the Bucket Strategy, your first priority is filling up bucket one. Youll begin investing in buckets two and three once bucket one is full.

When fully funded, bucket one should ideally contain two years of retirement living expenses.

Thats not the same as two years of your expenses right now. Most experts agree you can live in retirement for less than you do while working. Also, the income you plan to need can take into account reliable retirement income such as a pension or yield from no-risk accounts. Finally, take your likely life expectancy and the impact of inflation into this calculation.

Once youve fully funded bucket one, begin investing in buckets two and three. How much to put into each depends mostly on your time horizon for retirement.

The closer you are to retirement, the more should go into bucket two. The more time you have, the more should go into bucket three. For example, assuming a planned retirement age of 72:

  • At age 30, you have plenty of time to accumulate savings and ride market swings. You might choose to put 25% into bucket two and 75% into bucket three.
  • At age 50, youre just two decades out from your retirement and might split the buckets 50/50.
  • At age 60, youre closing in on the minimum timeline for bucket three. A split of 75% in bucket two and 25% into bucket three might be the most appropriate.

How To Manage The Bucket Strategy

The most popular post Ive ever written was titled How To Build A Retirement Paycheck, which outlines the details of how we were setting up The Bucket Strategy for retirement. It seems a lot of you have an interest in the topic, for good reason. Moving from the Accumulation Phase to the Withdrawal Phase is one of the biggest challenges in retirement, and The Bucket Strategy is the method weve chosen to manage the transition.

However, that post was missing something that several of you have asked about. The questions revolve around the issue of how to manage the bucket strategy in retirement. Since Ive now experienced 18 months of living with The Bucket Strategy in retirement, I felt it was an appropriate time to address what weve been doing to manage the bucket strategy. This is Part 2 of The Bucket Strategy Series, other posts are listed below:

The Bucket Strategy Series:

What Is A Bucket Portfolio

Bucketing means dividing a portfolio into three main investment time horizons: a long-term bucket, a medium-term bucket and a short-term bucket.

The goal is to insulate the long-term bucket from near-term cash flow needs, allowing the equity portion of the portfolio to remain invested longer and grow over time.

Annual retirement income is drawn from the short-term bucket, which holds several years in reserve and is topped up from the medium-term bucket. The top-up process is tailored to the investors unique circumstances and general market conditions.

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The 3 Buckets Strategy For Retirement Income

by Maggie

Do you know how much is your retirement income and where it comes from? Have you figured out if you have enough savings to cover your expenses in retirement?

When youre in your 30s or 40s, the idea of retirement is far away. But when youre in your 50s and 60s, the retirement is around the corner and not a theory anymore. You need to understand how much you will receive from Social Security or pension . You need to calculate the balances on your retirement accounts like 401, IRAs, Roth IRAs. Also, you need to figure out how much you will be able to withdraw each month.

When you retire and stop receiving a steady paycheck, you need to learn how to generate retirement income to pay for your expenses. Some of your income will come from Social Security, but the rest should come from your nest egg.

Recently I read a lot about the bucket strategy for retirement income. This strategy becomes popular and got discussed among many financial experts. With this strategy, you will divide your saved money between several buckets investment portfolios. Each bucket or portfolio will be divided based on the time when you need money, asset allocation, and other goals.

How To Use The Bucket Strategy For Retirement Asset Allocation

The Bucket Approach to Retirement Allocation

At a glance:

  • What is the bucket strategy for asset allocation?

  • Maintaining the bucket strategy

  • Summary of the bucket strategy and retirement allocation

The bucket approach to retirement-portfolio management, pioneered by financial planning guru Harold Evensky, effectively helps retirees create a paycheck from their investment assets.

The bucket concept is anchored on the basic premise that assets needed to fund near-term living expenses ought to remain in cash, dinky yields and all.

Assets that won’t be needed for several years or more can be parked in a diversified pool of long-term holdings, with the cash buffer providing the peace of mind to ride out periodic downturns in the long-term portfolio.

Here’s how the bucket approach works and how to fill each bucket.

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Bucket 3 10 To Remaining Years Of Retirement

The bucket 3 is for the late retirement years 80 and older.

In your late years of retirement, you will spend less money on activities and travels, but more on healthcare. Unfortunately, medical spending tends to be higher in the last years of your life. Many retirees must move to an assisted living facility or a nursing home. Some can stay home and hire a home health aide. If you have long-term care insurance, it might help to pay a portion of nursing home or home health aide bills.

The goal for bucket 3 is long-term growth. Since you dont need this money for 20 or more years, you could be more aggressive with your investment.

The money you put in this bucket should be invested in stocks and mutual funds. Although investing in assets like stocks is considered a risky investment, its still a good way to grow the money you dont need for long time.

Time Buckets Help You Visualize Your Situation

“It’s a mental accounting that allows people to separate market fluctuations from their income streams,” says Scott Kuldell, senior vice president of research and innovation at Fidelity. “People get nervous when markets go down. So if you separate out cash mentally and know it can last you long enough for the tide to turn around, you feel better that you can ride it out.”

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Case Study: What Impact Will This Have On Income

To demonstrate the impact the Cash Buckets 2.0 approach can deliver, we have compared two self-funded retiree investors portfolios. Both have set aside $60,000 per year for three years of their retirement. This is approximately equivalent to the ASFA Retirement Standard Comfortable lifestyle for couples .

Jack adopts the traditional approach to Cash Buckets, investing three years of expenses in cash and term deposits, generating a first-year return of 0.55%, or $975.

Jill adopts the Cash Buckets 2.0 approach, investing in a combination of Cash and term deposits for Year 1 and the Schroder Absolute Return Income Fund in Years 2 and 3. She has been able to increase her yield in Year 1 by 0.83%, representing an additional $1,500 in income for the year.

For the purposes of this example, we have assumed that the Schroder Absolute Return Income Fund delivered a return, after fees of 2.00% p.a. based on the Funds after-fees performance target of 2.00% over the RBA cash target. The Funds return, after fees, for the 1-year period to 30 November 2020 was 2.96%. You should be aware that past performance is not a reliable indicator of future performance and there is no assurance that the Schroder Absolute Return Income Fund will be able to achieve its performance target.

Australian Bureau of Statistics: Selected Living Cost Indexes, Australia, Consumer Price Index, September 2020

How Does It Work

What products work best with the bucket approach to retirement income planning?

To use the bucket strategy, you divide your retirement assets into three categories based on when you will draw down on them. The first bucket is for money that you intend to spend very soon — over the next year or two. This money should not be invested. Keep it in your bank accounts.

The next bucket is for the portion of your portfolio that you expect to use in the medium term — say, from two to 10 years in the future. You can invest this money but not in assets that are apt to fluctuate too much. This bucket should be made up of fixed-income investments like certificates of deposit and bonds.

The last bucket is for growth. Money that you don’t expect to use for at least 10 years can be invested in instruments like stocks that will provide you with higher long-term rates of return. Even if there’s a market crash during your retirement, you will be able to hold onto those stocks for quite some time, which should give your portfolio time to recover. As bucket one runs low, you’ll replenish it from bucket two, which in turn should be topped off by shifting money from bucket three.

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The Benefits Of A Bucket Strategy:

The major benefit of the bucket strategy is simplicity.

I think dividing your savings into smaller portfolios or buckets with specific goals will help to manage them better than one big account. With the traditional 4% rule of thumb approach, you will generate retirement income by systematically withdrawing money from one big account.

You might lose money if youre forced to sell your investments to get cash in the stock market downturn. But using the bucket strategy approach, you will keep some money in cash for the current expenses and leave the rest of them to grow for the future.

How We Did It In Days Of Yore

In the past, one simple and elegant solution to the above problem was to buy an immediate annuity that would pay you a stream of income for the rest of your life. But many investors don’t like the loss of control that accompanies annuities. One other intuitively appealing idea is to sink your portfolio into income-producing investments such as bonds and dividend-paying stocks and live off whatever yield they generate. That way you might never have to tap your principal at all. The big drawback, however, is that you’re buffeted around by whatever theinterest-rate gods serve up. When yields are up, you’re living high off the hog when they’re miserly, you have the unappetizing choice of scaling your spending way back or venturing into riskier income-producing securities to get the yield you need.

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Safe Withdrawal Rate Vs Buckets

Retirement savings traditionally means building up a lump sum of money and investing the entire amount in such a way that balances safety and returns. Then, at retirement, the investor withdraws a small percentage of the lump sum each year, or the “safe withdrawal rate” — an amount, usually around 4 percent of the entire investment, that experts predict is safe to take out without risking that the retiree will run out of money. The bucket approach turns this idea on its head by calculating the income that the retiree will need in retirement and then filling up several conceptual “buckets” of money, one for each stage of retirement, which the retiree is free to draw down.

Bucket : Emergency Savings And Liquid Assets

the bucket approach to retirement allocation

This first bucket is your cash bucket, made to give you operating funds during retirement. Ideally you want one to two years of living expenses in this account so you never have to touch the other buckets if something goes badly wrong.

Because emergencies rarely happen with polite and sufficient warning, bucket one money goes into no-risk types of accounts accounts that will never lose value no matter how badly the market does. You also need to be able to access the funds quickly and without fees or tax penalties. Some common examples include low-risk bonds, short-term bonds, traditional savings accounts, and annuities.

The purpose of this bucket is to cover gaps in your post-retirement income. If youre living largely off interest and dividends, you can draw from bucket one if the market takes a downturn and these payments dry up.

If youre living off a fixed income such as a pension or Social Security benefits, you can pull more from this bucket if your cost of living increases. Its also a source of one-time cash infusions for a home repair, dream vacation, or to help out the kids and grandkids.

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What Is The Three

Ashutosh Gupta explains the mechanism of this strategy and suggests funds suitable for each bucket


Please explain the 3-bucket strategy for a retiree to get regular income from his retirement corpus and which category of mutual funds to be used in each bucket.– Anant Garg

The idea with a three-bucket system for retirement is to apportion your retirement corpus across different time buckets suitable for that time horizon and help you derive regular income. For instance, the money you need as regular income in the next one to one-and-a-half years has to be invested in an absolutely safe way so that your income needs are well taken care of during this period. So, return is a secondary criteria, and thus, products like liquid funds suit this kind of a bucket.

As we move slightly beyond, up till the next three to four years, the aim is to generate steady growth. Even though the returns might be modest in this bucket, the idea is not to take any undue risks. High-quality debt products such as high-quality short-duration funds can fit the bill here.

Beyond that, for a slightly longer horizon, the idea is to invest so that your investments can generate inflation-beating returns for those long years of retirement. Therefore, it is necessary to add a little bit of equity to your overall mix of investments in this bucket.

Post Your Query

Taking A Bucket Approach To Asset Allocation In Retirement


Managing investments in retirement is challenging enough, but steering them through volatile and uncertain times, in particular in a post-COVID world, can be harrowing. Yet it is an unavoidable task for the four to five million Americans who retire every year.

As a Certified Financial Planner, I regularly encounter the concerns of clients who are in or considering retirement. Their questions about how they should be invested vary widely, from whether they should adhere to the age-old idea of owning the percentage of bonds equal to your ageif youre 65 you should have 65 percent of your invested dollars in bondsto whether someone with enough money to live comfortably for the rest of their life and no desire to leave a legacy should take no risk at all .

As Im having more and more of these conversations with clients, I decided to take a look at a more quantitative approach to investing in retirement. You might have heard of a bucket approach to retirement income planning? What if we use a similar approach to asset allocation?

StrategyThe idea involves using your needs in terms of retirement income to create a series of buckets that combined will supply that income. The strategy is completely customizable to each individual based on risk tolerance, personal goals, and variables like inflation. For illustration purposes, lets use a broadly applicable if oversimplified approach:

The buckets:Bucket #1: $100,000 Bucket#2: $400,000 Bucket#3: $1,000,000

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The First Bucket Is Key

The linchpin of any bucket framework is a highly liquid component to meet near-term living expenses for one year or more.

When cash yields are close to zero, bucket 1 is close to dead money, but the goal of this portfolio sleeve is to stabilize principal to meet income needs not covered by other income sources.

To arrive at the amount of money to hold in bucket 1, start by sketching out spending needs on an annual basis.

Subtract from that amount any certain, non-portfolio sources of income such as Social Security or pension payments.

The amount left over is the starting point for bucket 1: That’s the amount of annual income bucket 1 will need to supply.

More conservative investors will want to multiply that figure by 2 or more to determine their cash holdings.

Alternatively, investors concerned about the opportunity cost of so much cash might consider building a two-part liquidity poolone year’s worth of living expenses in true cash and one or more year’s worth of living expenses in a slightly higher-yielding alternative holding, such as a short-term bond fund.

A retiree might also consider including an emergency fund within bucket 1 to defray unanticipated expenses such as car repairs, additional health-care costs, and so on.

How Does Your Current Plan Stack Up

Benz: Building Your Retirement Portfolio

Are you confident that your existing financial plan will be able to meet your needs far into the future?

Ask yourself these questions:

  • Do my current allocations plan for and mitigate market risk, interest rate risk, and sequence of returns risk?
  • Do my current asset allocations consider the money cycle and the preservation phase?
  • Do I have a Soon bucket in place to meet my needs in the early stage of retirement?
  • Does my current plan proactively defuse tax time bombs?

If youre like most retirees, your answers to these questions will be a resounding no not by a long shot.

Now take a minute to assess your current financial health by filling out our Financial Health Scorecard.

This scorecard is a valuable tool that will help you pinpoint any specific areas of your financial life that need improvement as of today.

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