Funding Retirement with the Bucket Approach

Have you ever considered separating the money that you plan on drawing down during your retirement based on the phases of your retirement?  A common approach is to allocate different piles of money in separate buckets based on when you plan on using the money.  The Bucket Approach was made popular by Raymond J. Lucia, CFP as the result of his book Buckets of Money.  The theory is based on building a diversified portfolio and spreading the risk out across different buckets of money.

A common approach is to use three buckets, however, more buckets can be used:

Bucket A – Money that will be used for the first few years of retirement (years 2 – 5)

Bucket B – Money that will be used for the second period of retirement (years 3  – 10)

Bucket C – Money that will be used to fund the remaining years of retirement (years 11 – 25 and beyond)

Asset Allocation for Each Bucket

Since Bucket A is going to be the first source of retirement funding, it is suggested that this portion of the asset allocation be ultra conservative.  That is to prevent a major stock market sell-off or recession to deplete the money that will be used to cover the first 2 – 5 years of retirement expenses.  In this bucket, the assets should be invested in CD’s, money market accounts, short-term bonds, or FDIC insured savings accounts.  By always having between 2 – 5 years worth of expenses in liquid assets that are easy to access, it helps from having to sell-off stocks when they have gone down in value.

Bucket B is going to be constructed of a more moderate asset allocation than Bucket A.  This bucket is designed to produce higher returns than Bucket A.  This bucket should have an asset allocation of around 65% in bonds and 35% in stocks.  The bonds are a low-risk investment that provides higher income than short-term holdings.  The stock portion is used to fuel growth and stay ahead of inflation.  The bond allocation could be made up of both an intermediate-term bond fund and a TIPS fund.  A large-cap index fund or large-cap dividend fund are good options for the stock portion of Bucket B.

Bucket C is going to have a more aggressive asset allocation than Bucket A and B.  This bucket of money will be used for long-term growth.  It will be made up of an asset allocation of 75% in stocks and 25% in bonds.  By keeping a portion in bonds, an investor can rebalance annually.  This practice of buying low and selling high improves the long-term performance and reduces the risk of this asset allocation.  For the bond allocation, a total bond market fund is a good option.  For the stock allocation, a more diversified mix of large-cap, small-cap, and international stock funds are used in this portion of the bucket for aggressive growth.

Refilling the Buckets

With a more traditional approach to asset allocation, a portfolio is viewed as a whole and not fragmented into different categories based on when the money will be needed.  For example, a balanced portfolio might be made up of 40% in bonds and 60% in stocks.  If stocks have a good year and the new asset allocation is 65% stocks and 35% bonds, the investor simply sells the stocks high and rebalances back to the desired asset allocation.

With the bucket approach, there is rebalancing within each bucket as well as replenishing between buckets.  Bucket A has 2- 5 years worth of living expenses.  When Bucket A has 1 years worth of living expenses drawn down, the difference will be replenished from Bucket B.  The same process applies between Bucket B and Bucket C.  When money is moved from Bucket B to Bucket A, Bucket B must be replenished from Bucket C.

Buckets vs Systematic Drawdown

Some financial advisors favor the buckets approach for the psychological benefits it provides investors.  When an investor is faced with a major market decline, they feel more confident because they know they have 5 years of living expenses in cash.  That financial cushion helps to prevent investors from selling stocks when they are at or near the bottom of a market.  Bucket A provides a level of comfort during good times and bad.

Other financial advisors prefer a systematic drawdown approach.  It is viewed as an easy approach for investors to understand and apply.  They feel that it is less complicated for an investor to view their portfolio as a whole and to use a safe withdrawal rate of 3 – 4% from a conservative portfolio of 50% in stocks and 50% in fixed assets.

There are more similarities between these two approaches than there are differences.  Even though there are three different asset allocations, in the three different buckets, when they are added together, they still can simply add up to the same mix of 50% in stocks and 50% bonds in the portfolio that is applied in a systematic drawdown approach.  It is just a different way of mentally accounting for assets during retirement.

Implementing the Buckets Approach

The buckets approach should be considered by people who are planning on retiring early.  Many people save up substantial resources in their 401K, but cannot access their money until age 60.  The buckets approach can be an alternative to a Roth conversion.  This approach just has to be planned years in advance because it requires an investor to build up substantial savings in their taxable account along with their tax-deferred accounts.

For this example, let’s assume that a person wants to retire at age 50, requires $50,000 per year for living expenses, and has $500,000 of their $1.5 million-dollar portfolio in taxable savings.  This scenario would be ideal for the buckets approach:

Bucket A – $250,000 in taxable savings (age 50-55)

Bucket B – $250,000 in a taxable account (tax-free bonds, age 56-60), the remaining mix of assets in an IRA or 401K to be drawn down after age 60

Bucket C – All in an IRA or 401K


The buckets approach is slightly more complex than a systematic drawdown strategy.  The main benefit is that it helps to keep the mind of the investor more at ease during all market conditions.  If managed correctly, the theory is that an investor will always feel secure because they always have 2 – 5 years of cash to fund the next few years of expenses.

The buckets approach is customizable to your unique situation.  The three buckets approach is the most common strategy.  It is the most ideal for a retiree who has at least 25 years of living expenses in savings.

More buckets can be added.  For example, if you have more than 25 years worth of projected living expenses in savings, you can add more buckets to extend your savings further out into the future. You also must take into consideration if you have a taxable account, a 401K with RMD’s (Required Minimum Distributions) at age 70, a Roth IRA account that does not require RMD’s, and Health Savings Account (HSA) to cover future medical bills.

If you are looking at establishing a conservative drawdown strategy, a buckets approach is worth considering.  It requires a little more work than a standard systematic strategy.  However, if you enjoy the mental accounting, the extra work might add to your peace of mind.  Just as when you were working towards building your wealth, the best plan is the one that you can follow.

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12 thoughts on “Funding Retirement with the Bucket Approach

  1. FullTimeFinance

    Not really feeling the bucket approach mainly because it’s an artificial construct. Money is fungible so in reality the buckets are not real. Now psychologically it may work for some, as mathematics and psychology can some times diverge. But it’s quite risky if you choose the wrong buckets for the scenario. I prefer the concept of having a safe allocation equal to x percent of my portfolio where x aligns with my needs both psychological and real. Then pull out based on the systemic approach.

  2. Church

    Thanks for posting. I believe a lot of people can benefit from either strategy because it invokes the discipline of consistent saving and investing. And if we have learned anything, consistent saving and investing is a winner every time.

    Thanks again for sharing.

  3. Michael @ Financially Alert

    I like the bucket system as a metaphor for those just starting out. It really makes sense of a mundane topic that most people don’t want to understand. Once you’re off and running, however, it could make sense to add some additional constructs to benefit your personal situation. Nice post explaining!

  4. MrFireby2023

    Very well-written, very thorough and very informative. Kudos to you. I wouldn’t be able to Out-write you with an article on this subject on my best day.
    I really favor this bucket approach for someone in my situation, five years from FIRE. I’m very Risk-averse you explained this approach in a way I can identify with, keeping my mind at ease during volatile times like the one we’re in.

    1. thefinancialjourneyman Post author

      Thank you, mrFireby2023.

      Some people find the buckets approach can put their mind at ease during retirement.

      Other people feel that it is too much effort.

      The best approach is the one that someone can stick with.

  5. Pat

    Your blog article demonstrates the facts that investor financial philosophy is just as important as your investment tools. Your risk adversity can drive your investment train.

  6. FI-sician Assistant

    In running the numbers, it seems like you are advocating only having 55% of your portfolio in stocks. You have 0% in bucket A, 35% in Bucket B ($87,500 of the $250,000), and 75% in Bucket C ($750,000 of the remaining $1,000,000) and advocate a 3.33% withdrawal rate ($50,000 per year off a $1,500,000 portfolio). This appears really conservative and I would be concerned that a market downturn would leave you with little left to refill the buckets with as you have just over $660,000 of your portfolio sitting on the sidelines earning less than 3% per year as this is your portion in savings or bond portfolio.

    I understand the concept but worry that this approach won’t keep up with even modest inflation over the course of even a 20 year retirement.

  7. Kevin

    Could you give some examples of using the Bucket approach in a down market? If Bucket two is down, do you forgo refilling Bucket one in year two?

    1. thefinancialjourneyman Post author

      Hi Kevin,

      Thanks for stopping by.

      The way I see the bucket approach is to always have enough liquid investments to cover a few years without having to sell stocks low during a down market. It is up to the investor to determine how many years of cash that they feel comfortable with.

      In the first bucket, you can keep a few years of cash to get you past a recession.

      Bucket two has some equities but is still very conservative. Between 2007-2008 bucket two would have had almost a 2% gain.

      Most of the volatility will be in the last bucket.


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