The Bucket Strategy: Investing for Retirement in 2022


Many retirees and soon-to-be retirees find the idea of managing their investments intimidating, especially during the difficult investing environment we find ourselves in today. The Bucket Strategy is a long-held and easy-to-understand method of how to invest for retirement.

But does the Bucket Strategy still work in 2022? Be sure to read until the very end where I share my opinion – and another way to think about managing your portfolio in retirement.

What Is the Bucket Strategy?

The Bucket Strategy was created by legendary financial planner Harold Evensky in the 1980s. In Mr. Evenksy’s concept, there were two buckets: one that held five years of retirement spending in cash and one that consisted of mostly long-term, growth-oriented investments such as stocks.

Over the years, the strategy has evolved; the consensus bucket strategy today has three buckets:

  1. A bucket for short-term investments,
  2. A bucket for intermediate-term investments, and
  3. A bucket for long-term investments.

Each bucket has its own purpose supported by specific investments. Let’s dive into the details of each.

Bucket 1: Cash Reserves

The purpose of the first bucket is to cover the next few years of retirement with safe, liquid investments. Unsurprisingly, Bucket #1 typically consists of cash. While some may try to maximize yield by adding CDs or using high-interest savings accounts, the focus here is on the safety of principal.

While there’s no right or wrong answer for how much to put in Bucket #1, a good starting point would be an amount equal to one to two years’ worth of retirement living expenses.

Bucket 2: Intermediate-Term Investments

Looking further into the future for your retirement income needs, Bucket #2 contains intermediate-term investments that have higher growth and yield than what’s typically offered by cash. Bucket #2 would consist of bonds, asset allocation funds, or other low-growth, low-volatility investments that will – ideally – keep pace with inflation.

The idea for Bucket #2 is to invest for years 3 to 10 of retirement. We want more growth than cash, but not so much volatility that a bear market would decimate its value. Remember, the Bucket Strategy is an entirely made-up concept. For some retirees, Bucket #2 may only house years 3 through 6 of retirement, where a more conservative investor may want to house years 3 through 10. It’s entirely up to you.

Bucket 3: Long-Term Investments

Finally, Bucket #3 would be the home for long-term investments designed to provide growth and income for a decade and beyond. As you would expect, riskier, higher-return investments like stocks and REITs would be the focus of Bucket #3.

Using the Bucket Strategy, a retiree can allow all the long-term growth assets in Bucket #3 to rise and fall, secure in the knowledge they have the time to weather the ups-and-downs thanks to Buckets 1 and 2.

Your Retirement “War Chest”

An interesting concept that I like to use with clients is the retirement “war chest” idea. The sum of Buckets 1 and 2 gives you a retirement “war chest” of cash and bonds that allows you to access living expenses from your portfolio without tapping into your stocks in a down year.

Here, the idea is that you have several years’ worth of living expenses at your disposal during bear markets. How much is enough? Of course, that’s subjective for each retiree. However, if you ever go through the exercise of determining the size of your “war chest”, it just may allow you to sleep better at night if the market is down.

Pros and Cons of the Bucket Strategy

I like the Bucket Strategy as a way of thinking about your investments. In fact, I often use the “war chest” idea with retired clients to give them an idea of their ability to outlast any correction, bear market, or recession.

Unfortunately, the implementation of the Bucket Strategy is overly complicated. If you choose to set up strictly defined rules for each bucket, you could potentially run into a scenario where you would have to sell stocks while they’re down to replenish the other two buckets. We’re supposed to buy low and sell high, right?

The Bucket Strategy could also over-emphasize safe assets rather than overall investment risk. Some retirees may find that, after reviewing their financial plan, they need to take on a certain amount of investment risk to make the numbers work. The Bucket Strategy may overly skew them toward bonds and cash, especially if they have income in retirement such as a pension.

A Better Option

Instead of using the Bucket Strategy to manage your retirement portfolio, a better solution is to carve off an emergency cash fund and view the remaining investments as one portfolio to be managed. Having one asset allocation for your investments allows for easier rebalancing when it’s needed.

Not only is managing one portfolio easier, but several studies have also shown that retirees tend to have better outcomes using this method. With easier rebalancing comes better opportunities to buy low and sell high throughout retirement.

However, none of this means that the Bucket Strategy isn’t useful. Even though I prefer to manage retirement investments as one portfolio, I’ve found that the Bucket Strategy is a great way to think about your retirement investments. This is particularly true in corrections or bear markets.

Knowing that you have several years’ worth of living expenses in cash, bonds, and other low-volatility assets makes it much easier to sleep well at night.

If you need help putting together a retirement investment strategy, then click here to set up a quick, complimentary introduction call to see if Prana Wealth is a good fit. We do still have the capacity to take on new clients.

As a fee-only financial advisor in Atlanta, we can (and do) work virtually with clients all across the U.S. and we’re here to help you when you’re ready.

The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but is intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax, or financial advice. Please consult a legal, tax, or financial professional for information specific to your individual situation.
ipad free ebook: How to Retire Checklist
Retirement help delivered to your inbox
Subscribe to our monthly newsletter and get your copy of our free ebook: The ‘How to Retire’ Checklist