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:
- 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.
- 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.
- 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.