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Three Bucket Retirement Strategy – What Is This Investing Approach?


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The best part of retirement planning is the wide variety of options. No matter what your situation, preferences, or tolerance for risk, you can find a way to organize your finances to set yourself up for a comfortable retirement

The worst part of retirement planning is the wide variety of options. There are so many available, it’s hard to figure out which one is best. Worse, the sheer number of choices can paralyze some of us into not choosing anything, and delaying when we start preparing to retire. 

Enter the Bucket Strategy, a broad-stroke way of understanding strategic asset allocation. 

What Is the Three Bucket Strategy?

Originally created in the 1980s by financial planner Harold Evensky, the Bucket Strategy simplified personal finances by dividing assets into two categories, or buckets. Later, Evensky revised the strategy by adding a third bucket to provide an extra layer of security or growth potential, depending on a client’s needs. The three buckets are:

  • Bucket 1: Emergency savings and liquid assets
  • Bucket 2: Medium-term holdings
  • Bucket 3: High-risk holdings for long-term investments

By dividing assets into those three buckets, an investor sees to all three of the basic needs for investing. Here’s a breakdown of each bucket, how they interact, and what that all means to you.


The Three Buckets of Retirement Planning

Each of the three buckets in this method represents putting assets toward a different need for your financial health. 

Bucket 1: Emergency Savings and Liquid Assets

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 you’re living largely off interest and dividends, you can draw from bucket one if the market takes a downturn and these payments dry up. 

If you’re 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. It’s also a source of one-time cash infusions for a home repair, dream vacation, or to help out the kids and grandkids. 

Bucket 2: Medium-Term Holdings

This second bucket is for your short-term and medium-term goals — money you might access before retirement but whose primary purpose is earning you interest and dividends. Bucket two money might sit for a decade or longer, waiting until you take that once-in-a-lifetime vacation, put a down payment on a dream home, or start writing checks for your childrens’ college tuition. 

Medium-term investments have some tolerance for risk and loss, but you want to hedge those bets as much as is reasonable by purchasing medium-risk and medium-return assets such as blue chip stocks, dividend stocks, corporate bonds from high-quality institutions, certificates of deposit, money market accounts, high-quality mutual funds, and similarly reliable vehicles. 

Bucket two’s mostly reliable, medium-term growth makes it the well from which bucket one springs. As assets in bucket one get poured out, you refill it from bucket two. Ideally, you want between three and five years of living expenses in this bucket. 

Bucket 3: High-Risk, Long-Term Holdings

The third bucket is for the long haul, serving as at least a portion of your retirement fund. Because it’s life cycle is measured in decades, it has more tolerance for risk. 

Stocks that lose money for five years often become profitable for the next 10, and such long-term vehicles usually rebound from situational losses like a housing crash or global pandemic. 

Because of this, your bucket three assets can include risky stocks, commodities, junk bonds, real estate, and currency speculation with a higher chance of losing money, but also a better chance of a highly profitable stock market surge. Whether you personally like to play the market or just want to give instructions to a broker or financial advisor, that’s what this bucket is for. 

Bucket three houses funds for long-term growth, and refills bucket two as its balance drops from filling bucket one. Bucket three refills through the earnings of its investments, and through any new money you continue to put in.


The Bucket Strategy Pre-Retirement

The above describes what you do with your buckets once you’ve retired, but two important questions exist for using the Bucket Strategy during your working years. How much money should go into each bucket, and where do you get the money from?

How Much Money Goes in Each Income Bucket?

When you begin using the Bucket Strategy, your first priority is filling up bucket one. You’ll 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. 

That’s 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 you’ve 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, you’re just two decades out from your retirement and might split the buckets 50/50.
  • At age 60, you’re 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. 

Regardless of the formula you settle on, you should monitor the buckets just like you would with any other investment. As the balances shift with market changes, you can rebalance your contributions to keep the proportions where you’re most comfortable.

You also need to consider how many years of retirement you’re likely to enjoy. This is a somewhat fraught train of thinking, since it involves guessing your lifespan, but it’s important. If your retirement portfolio will keep you going for 25 years after retirement, and you live for 30 years, that can lead to a rough last five years of life.

Where Do You Get the Money From?

The money for each of your retirement buckets doesn’t form three bank accounts labelled “Bucket One” through “Bucket Three.” As convenient as that might be, the reality of retirement investments doesn’t work like that. 

You’ll get most of the money for the buckets first through traditional retirement vehicles, such as a 401(k), IRA, or Roth IRA. Most of the time, you’ll make the contributions through withholding from your paycheck, hopefully with some kind of fund matching from your employer

Create the buckets from these accounts by allocating the funds toward different types of investment. Although you might have just one retirement account, you can assign the balances and proportions put toward different vehicles to each bucket. 

Beyond traditional retirement accounts, you might also put extra money into your buckets through personal investments. You’ll want to do the same thing, earmarking different vehicles toward different buckets, then combining their balances with those in your traditional retirement accounts to know what each bucket holds at any given time. 


Three Bucket Strategy for Retirement: Pros and Cons

Some people are dedicated advocates of the Bucket Strategy for retirement. Others are staunchly opposed to this investment strategy. It’s impossible to say for certain whether it’s right or wrong for you, but consider the following pros and cons before deciding to use it. 

Pros of the Bucket Strategy

These are the main benefits of the Bucket Strategy that make it appealing to many retirement savers.

1. Conceptual Simplicity

As mentioned above, investment is a complex field with an overwhelming array of options. The Bucket Strategy provides an easily understood framework for thinking about money in retirement, and for allocating assets toward to fit your needs. 

2. Allows for a Range of Risk Tolerance

By dividing your assets into three categories, each with a different level of risk and potential gain, your retirement savings can encompass a diverse range. This balances your need for growth against your need for reliable returns. 

You can shift the proportion of your buckets to reflect your diminishing risk tolerance as you get closer to retirement, allowing your asset allocation to protect you from a market downturn. 

3. Provides Both Access and Growth

By having three buckets, each tailored for different levels of growth and relative ease of access, you get a best-of-both-worlds situation. You always have money ready at hand, money earning reliably, and money in higher-risk, higher-growth vehicles. At any given time, you have a segment of your portfolio actively available for your investment and living expense needs. 

4. Protects Against Down Markets

By dividing assets into three sections, and seeing to both immediate cash needs and medium-term funds first, the three-bucket strategy shields your assets from individual failure or a general bear market. Only the third bucket is particularly vulnerable to market risk, and it’s built intentionally for longer-term time frames that resist and recover from market volatility. 

Cons of the Bucket Strategy

No strategy is perfect. Here are the primary shortcomings of the Bucket Strategy you should be aware of before you decide to employ it.

1. Over-Relies on Accurate Forecasting

Implementing the Bucket Strategy for retirement rests on the foundation of accurately forecasting how much money you will need in retirement. The Bucket Strategy isn’t suitable for people unable to make an accurate prediction of their post-retirement expenses.

If you overestimated your expenses, that puts too much money in bucket one, meaning that money isn’t in the other buckets earning interest and dividends. If you underestimated, you have to move money earlier than intended, costing fees and opportunities. 

2. Cumbersome to Manage

Because individual retirement accounts won’t map perfectly to the buckets themselves, applying the Bucket Strategy requires extra work and bookkeeping. As market fluctuations change account balances, it requires regular rebalancing

If you’re managing your portfolio on your own, using the strategy also requires you to understand at least the basics of investing at each level. If you’re hiring a broker or financial advisor, they might charge extra for the administrative efforts involved. 

3. High Barrier to Entry

The Bucket Strategy only really starts in earnest after you’ve filled bucket one. For many people, accumulating two years’ worth of living expenses takes a long time. Those are years spent not investing in higher-yield instruments that could accumulate wealth in the years they do the most good. 

This is especially concerning when you consider that over half of Americans lack the money to accumulate even a $1,000 emergency fund with their current proportion of income and expenses.

4. Sacrifices Growth for Safety

The three-bucket strategy is highly conservative, beginning with putting a large amount of money in low-yield accounts, and emphasizing slow-growth, low-to-medium risk investments for at least half of what remains. This can mean lower wealth overall upon retirement by playing your investments too safely when a bit more risk might have served you better. 

Bucket Strategy Alternatives

Although a discussion of all the possible retirement options is beyond the scope of this article, below are a few alternative structures to the Bucket Strategy you may want to consider before making a final decision.

  • The Income Floor Model, which introduces a fourth bucket of guaranteed income from sources like rent or pensions. This fourth bucket could be considered “Bucket Zero,” and feeds bucket one during good years, keeping the system more fully loaded for leaner times.
  • The Total Return Approach, which uses only two buckets. Bucket one holds one year of expenses to access in real time, and bucket two holds a diversified portfolio aimed at growth.
  • Systematic Withdrawal, in which you invest across a broad spectrum of vehicles, and periodically withdraw a proportional amount from each to maintain your living expenses. 

Each of these options has pros and cons as compared with the Bucket Strategy, and against one another. 


Final Word

The Bucket Strategy for retirement is just one of myriad financial planning options for organizing your thinking about retirement. It has strong potential when done correctly, but is more difficult to implement than some other options. 

Nobody can tell you for certain which method is best for you, but learning about common strategies helps you answer some questions and prompts you to ask others. If you’re not sure which approach makes sense for your particular situation and goals, you may want to discuss them with a Certified Financial Planner

Regardless of the method you choose, the goal is to help you stay on track to enjoy a comfortable retirement

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