How to Use the Bucket Strategy for Retirement Planning

Retirement planning can feel overwhelming. There are countless investment options, complex calculations, and seemingly endless advice. But what if there was a straightforward approach that helped you manage risk and build a secure future? Enter the bucket strategy.

Developed by financial planner, Michael Kitces, the bucket strategy is a remarkably simple yet powerful method for organizing your retirement investments. It’s based on the idea that you need investments with different risk profiles and time horizons. Let’s break down how to implement it.

What is the Bucket Strategy?

The bucket strategy divides your retirement savings into different “buckets,” each with a specific investment goal and time horizon:

Bucket 1: Short-Term (0-3 Years): This bucket holds cash and very low-risk investments. Think high-yield savings accounts, money market funds, or short-term CDs. The goal here is preserving capital and having easy access to funds for immediate expenses, like unexpected medical bills or a new car.
Bucket 2: Intermediate-Term (3-10 Years): This bucket holds investments with moderate risk. Typical holdings include a mix of bond funds, balanced funds, and potentially some conservative stock funds. The aim is to grow your savings while still protecting against significant market downturns.
Bucket 3: Long-Term (10+ Years): This bucket represents your growth engine. It’s primarily invested in stocks – growth stocks and potentially some international stocks – with the goal of maximizing returns over the long term. This is where you’ll take on the most risk.
Bucket 4: Tax-Free Bucket (Optional but Highly Recommended): This bucket is specifically for tax-free retirement income. Contributions are often made with after-tax dollars, but growth and withdrawals in retirement are tax-free thanks to accounts like Roth IRAs or Roth 401(k)s.

How to Implement the Bucket Strategy

Determine Your Time Horizon: Honestly assess when you’ll need to start drawing income from your retirement savings. This will largely dictate the allocation within each bucket.
Establish Your Risk Tolerance: How comfortable are you with market volatility? This will influence the percentage of your portfolio allocated to each bucket. Generally, younger investors with longer time horizons can tolerate more risk.
Allocate Your Assets: Based on your time horizon and risk tolerance, divide your assets across the four buckets. A common starting point might be:
- Bucket 1: 10-20%
- Bucket 2: 30-40%
- Bucket 3: 30-40%
- Bucket 4: 10-20% (if utilizing a Roth account)
Rebalance Regularly: Over time, market fluctuations will cause your asset allocation to drift. It’s crucial to rebalance your portfolio regularly – typically annually or semi-annually – to maintain your desired allocation. This can be done by selling some assets in overperforming buckets and buying assets in underperforming ones.
Consider Professional Advice: While the bucket strategy is relatively straightforward, it’s always a good idea to consult with a qualified financial advisor to discuss your specific circumstances and goals.

Benefits of the Bucket Strategy

Simplicity: It’s easy to understand and implement.
Risk Management: Allows you to manage risk by diversifying across time horizons.
Flexibility: Adaptable to changing market conditions and personal circumstances.

Resources

Michael Kitces on the Bucket Strategy - The original explanation of the strategy.
Investopedia - Bucket Strategy - A helpful overview from Investopedia.

Do you have any questions about the bucket strategy?