The retirement bucket strategy involves dividing retirement savings into three buckets or categories: short-term, intermediate, and long-term. This 3-bucket strategy can help retirees maintain cash flow throughout retirement and determine how best to spend their money. It can help retirees cover their short-term needs while allowing some of their investments to grow, even in the midst of fluctuating market conditions.
The Short-Term or Immediate Bucket
Fill your short-term bucket with cash savings accounts, short-term certificates of deposit (CDs), money market accounts, and short-term U.S. Treasury bills. Your short-term bucket also includes your Social Security and pension benefits. This bucket of money should be readily available to meet your immediate financial needs. While everyone prefers to have their money work for them by earning interest, this is not the primary goal for assets in your immediate bucket.
Plan to have enough money in your immediate bucket to cover two to five years of expenses. These time horizons are flexible and should align with your investment choices and financial priorities.
To build your short-term bucket, calculate your budget for living expenses and add in a financial cushion for emergencies and unexpected opportunities.
The Intermediate Bucket
Investments in your intermediate bucket should generate enough interest to match inflation. These conservative to moderate-risk investments, such as longer-maturity bonds, CDs, large-cap value and preferred stocks, growth and income bonds, and REITs, should continue to grow at a rate that matches or slightly outpaces inflation.
Invest assets in your intermediate bucket to cover the next phase of your retirement, up to year ten. Choose investments that keep pace with inflation but are not too risky.
The Long-Term Bucket
Your long-term bucket should include assets that earn interest rates above inflation while filling your short-term and intermediate buckets. Long-term investments tend to be higher risk and have the potential to earn more interest. You may allocate these higher-risk investments across domestic and international assets, such as growth stocks, small-cap stocks, and high-yield bonds.
The Benefits of the 3-Bucket Strategy
One of the biggest benefits of using the 3-bucket retirement investment strategy is that it keeps your retirement investments organized and can help reduce stress, especially during times of market volatility.
The 3-bucket strategy can help protect your retirement funds from a market downturn, especially the more damaging ones that may occur earlier in your retirement years. The 3-bucket strategy provides a financial reserve to get you through downturns in the market.
The Drawbacks of the 3-Bucket Strategy
Investors may find that the 3-bucket strategy is a little too conservative and restrictive. While the assets in your long-term bucket should grow over time, this growth is unlikely to match inflation and keep up with your withdrawals. As you continue to deplete your short-term and intermediate buckets, your overall net worth and retirement income could decrease.
Especially during a strong market, having a significant portion of your investments in short-term, low-risk investments can generate lower overall returns than are possible with a more aggressive investment strategy.
If you do not have enough assets to adequately fund each bucket, you may find your retirement funds stretched too thin.
The 3-bucket strategy requires ongoing maintenance and monitoring, which can be complex and time-consuming.
A fee-only fiduciary financial advisor can help you structure your retirement buckets and allocate your assets so they provide an optimal balance between financial security and investment growth potential. They can help you monitor your investments’ performance and rebalance them as needed.
Alternatives to the 3-Bucket Strategy
Many retirees use the 4% rule. They distribute 4% of their investment portfolio value each year. This simple plan does not consider market performance or spending requirements. Your investments should provide income for at least 30 years of retirement if you withdraw 4% per year.
Another option is to take the entire value of your portfolio and divide it by your expected post-retirement lifespan. This systematic withdrawal approach is similar to the 4% rule in that it is straightforward and does not react to changes in market performance or spending needs.
There is no one-size-fits-all guide to investment. The 3-bucket strategy helps protect your income against market volatility, but it should be only one part of your comprehensive financial plan. Working with a wealth manager who uses a fee-only financial planning structure can ensure you make the best financial decisions for yourself and your loved ones. Ready to secure your financial future? Call us today at 866-395-1786 to get started.
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