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Implementing the Bucket Strategy for Financial Stability

April 22, 2024

Blueprint Income Team

Preparing for retirement involves determining how to save money to make sure you can cover all your expenses after you stop working. However, it's also important to figure out how much money you'll withdraw from your savings and how frequently you should do it. That's where methods such as the bucket strategy come into play, as planning a withdrawal schedule can help you prepare for various expenses that may arise during your retirement years.

The bucket strategy uses specific guidelines to help ensure you have the money you need to pay for short- and long-term costs. Here, we'll explore its key elements, including which buckets to create and how to rebalance them so they keep serving you throughout your retirement.

What is the bucket strategy?

The bucket strategy is a withdrawal method that involves establishing three specific asset allocations, each with its own withdrawal time frame. This helps to ensure that you have cash on hand for various expenses that may arise, such as medical bills, home repairs, and rent or mortgages. One of the most beneficial aspects of the bucket strategy is that it allocates funds for short-term expenses while still putting money to use in investments so your savings can continue to grow as you age.

This can be especially helpful when thinking about how long you'll live, as it ensures you have enough funds to support yourself through all remaining life stages. For more help figuring out how much money you might need to cover your expenses after retirement, use our longevity calculator.

How does the retirement bucket strategy work?

To use the bucket strategy, determine how much money your portfolio should generate each year so you can cover all your necessary expenses. Once you know this, you can allocate a portion of your retirement savings earnings to each bucket, ensuring it has the necessary funds to support that type of expense. For example, if your portfolio income requirement is $30,000 and your total retirement savings is $600,000, you can put $60,000 in your immediate bucket to ensure you have enough cash on hand for at least two years.

In the intermediate bucket, you can put $150,000 to allocate for five years of expenses. For the long-term bucket, you'll allocate the remainder of your retirement savings, ensuring it can be put toward investments to help generate the portfolio income you need to stay afloat. In this example, the long-term bucket would have $390,000.

What are the three retirement buckets?

Here's some more information about each of the buckets you can use to prepare for retirement:

Immediate bucket

The immediate bucket will contain liquid assets you can access easily to cover short-term expenses. These include living expenses, health care costs, and things such as gifts and luxury purchases. Even if your long-term investments drop in value, having sufficient funds in your short-term bucket can keep you covered for at least two years.

Intermediate bucket

In the intermediate bucket, you'll make a buffer in your portfolio that covers you when your immediate bucket gets drained too quickly. Aside from being an extra cushion if you take too much from your immediate bucket, the intermediate bucket can offer an opportunity to grow your wealth. Some assets you might include in an intermediate bucket are investment-grade corporate bonds, certificates of deposit, and dividend-paying stocks.

Long-term bucket

No one wants to outlive their retirement savings, and the long-term bucket helps prevent this. By keeping higher-risk investments in the long-term bucket, you can plan for drops in value without worrying about your ability to cover short-term expenses. In addition, since assets in a long-term bucket still have the potential to grow, you can often build even more retirement wealth in this area using assets such as growth stocks, commodities, and real estate investment trusts.

Rebalancing the three buckets

Since investments can perform differently each year and the markets are always changing, it's crucial to plan for rebalancing your portfolio, even when you use the bucket strategy. This can help you adjust your allocations to help ensure you have the money you need, even if some of your investments perform poorly.

For instance, if you take a significant amount of money out of your immediate bucket in a single year, determine the lowest you can go without needing to replenish it. When you approach that minimum amount, you can plan to sell some of your holdings in the intermediate bucket or long-term bucket to balance it back out.

What's the best retirement strategy to use?

When deciding which retirement savings strategy to use, it's important to think about your overall financial situation and your goals for the coming years. For instance, if you have a lot of capital and assets, the bucket strategy may be best for you. In contrast, if you don't have large retirement savings, you may need to consider a different strategy that requires less upfront capital.

Additional ways to save for retirement

Aside from the bucket strategy, there are a few other ways you can save money for retirement. For instance, the 45% rule helps you create a goal for your savings that allows you to generate at least 45% of your income when you retire. There's also the systematic withdrawal strategy, which gives you a specific percentage of your portfolio to withdraw each month or year, helping ensure you never take out more money than you can afford. Another option is to use investment opportunities, such as contributing to fixed annuities or investing in real estate.

The bucket strategy can be a great way to prepare yourself for your retirement years. By compartmentalizing your savings into these three areas, you help ensure you have funds for each type of potential expense, whether it's an immediate cost or a long-term savings exercise. This isn't the only option you have for building retirement savings, however, as you can implement other strategies, such as following the 45% rule or contributing to fixed annuities, that can help you build wealth. For more information about how to save effectively for your retirement using fixed annuities, visit our rates page.

Meta description: Learn about the retirement bucket strategy, including details about how the strategy works and how to use it continuously to support your retirement savings.


Blueprint Income Team

We are a team of finance, insurance, and actuarial professionals working to make it easier for everyone to achieve a steady and comfortable retirement. We write about annuities (the good and the bad) and provide strategies to help Americans prepare for retirement.