The Three-Bucket Strategy: A Roadmap to a Secure Retirement (Peace of Mind)

personal financial coaching

As a financial coach, I often advise retirees to consider the three-bucket strategy for managing their retirement income. This approach provides a structured framework for withdrawing funds while minimizing the risk of outliving your savings.

What is the Three-Bucket Strategy?

The three-bucket strategy divides your retirement savings into three distinct buckets, each with a different investment strategy and withdrawal timeline:

  1. The Short-Term Bucket (1-3 years):
  • Purpose: To cover living expenses for the next 1-3 years. 
  • Investment Strategy: Primarily invested in safe, liquid assets such as: 
    • High-yield savings accounts
    • Short-term CDs (Certificates of Deposit)
    • Money market funds
    • Short-term government bonds
  • Withdrawal Strategy: Withdraw funds as needed to cover living expenses. 
  1. The Medium-Term Bucket (3-10 years):
  • Purpose: To cover living expenses starting at year 3 through 10 years into retirement. 
  • Investment Strategy: A mix of: 
    • Short, Intermediate, Longer-term bonds
    • Some low-risk equities (e.g., high quality dividend-paying diversified ETF funds)
  • Withdrawal Strategy: Withdraw funds gradually, potentially adjusting withdrawals based on market performance. 
  1. The Long-Term Bucket (10+ years):
  • Purpose: To provide long-term growth and potentially increase purchasing power over time. Example: Annual growth would be used to backfill buckets 1 & 2 during annual rebalancing process.  
  • Investment Strategy: Primarily invested in a diversified portfolio of: 
    • Exchange Traded Stock Funds (S&P, Total Market, Dividend Growth, International, Emerg Mkts)
    • Alternatives: i.e. Real Estate 
  • Withdrawal Strategy: Withdraw funds strategically to minimize the impact of market volatility. Consider a systematic withdrawal plan or a rule-of-thumb approach (e.g., the 4% rule). Funds are also used to backfill buckets 1 & 2 when they start to run low. 

Benefits of the Three-Bucket Strategy:

  • Reduced Risk: By separating your assets into different time horizons, you reduce your exposure to market volatility.
  • Increased Flexibility: The strategy provides flexibility to adjust your withdrawal rate based on your needs and market conditions.
  • Improved Peace of Mind: Knowing that your short-term needs are covered can provide significant peace of mind during retirement.

Important Considerations:

  • Risk Tolerance: The allocation of assets across the three buckets should align with your individual risk tolerance.
  • Regular Reviews: Regularly review and rebalance your portfolio to ensure it remains aligned with your goals and risk tolerance.
  • Professional Guidance: Consider consulting with a CFP to develop a personalized retirement income plan that incorporates the three-bucket strategy.

Disclaimer: This blog post provides general educational information and should not be considered personalized financial advice. Please consult with a qualified financial professional for personalized guidance. 1  

In conclusion: The three-bucket strategy offers a valuable framework for managing your retirement income. By carefully considering your time horizon, risk tolerance, and investment goals, you can create a sustainable withdrawal plan that helps you enjoy a secure and fulfilling retirement.

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