Retirement Planning With The Bucket Strategy

Miyako

Miyako

Updated on

10 min read Affiliate Disclosure

Do you think about retirement and need help figuring out where to start? Have you been looking for the best retirement plan ever?

The bucket strategy is proven to be one of the best retirement withdrawal approaches for many. It’s easy and can be precisely shaped to your needs. 

You need as much money as possible to retire. Imagine having a salary for life and being stress-free. A good withdrawal strategy is critical for a stress-free retirement. 

Many wonder how to effectively use their investment portfolio during retirement. Withdrawing from their portfolios is difficult for professionals; imagine doing it alone. There is always a level of anxiety present with the fear of making a costly mistake.

Oftentimes, the most significant risk is yourself. 

Your behaviour after retirement can determine how much cash you have left. Human behaviour can be unpredictable, so understanding the risks may help you make the best decisions while considering the potential complications.

Should you take that expensive once-in-a-lifetime cruise? Can you afford it 20 years from now? It’s possible. Hence, you want to maximize the returns of your investments through retirement as much as possible. 

That said, you still have retirement dreams and goals like travelling the world and working on your hobbies. The bucket strategy is just one of many withdrawal strategies to help you reach your goals.

This approach will also help alleviate your emotional and financial turmoil because you will have the confidence to know exactly how much you have put aside for the future. However, remember that the more you spend, the less you’ll have in the future. 

Alleviating Your Fears

One of the biggest mistakes you can make when planning your retirement is not planning what you will use the funds for. It is essential to list what your retirement funds are specifically for.

For example, a specific need for your retirement fund will most commonly be living expenses. Keep in mind that this is not a “vacation” fund. You cannot live how you want; you may have to live modestly. 

The bucket strategy regulates your spending and adapts your thinking to prioritize what’s most important with the available funds. This strategy is also essential for consistently and maintaining your retirement bucket plan.

What Is The Retirement Bucket Strategy?

The bucket strategy involves separating assets according to when you will spend them. This creates a cushion for those in early retirement years while boosting your long-term investments. 

The difference between this strategy and others is your mindset while using it. You have to conceptualize the intentional, intended use of your money. So, ‘buckets’ are the different intended use categories lined up according to when you will need them. This builds your self-confidence that you will be cared for many years and that you don’t have to keep an eye on the sometimes volatile stock market. 

The retirement bucket strategy originated in 1985 by Harold Evensky, a wealth manager. It used to be called the ‘now vs. later’ approach, where the retirement savings were divided into two buckets: one for the next five years to be used for living expenses and the second for investments building long-term growth. 

Eventually, the number of buckets has expanded to meet real-life needs but stays moderate since the goal is to ensure the buckets remain full. From financial institution to institution or advisor to advisor, how many buckets you have can differ as well as what they call them. Some define the buckets to differentiate blocks of time, while others have buckets signifying a specific use, like living expenses. 

Using a bucket strategy for retirement is meant to ease concerns about market volatility, as your money is divided into different buckets. 

The Bucket Strategy: Drawdown or Time Release Funding

Drawdown is the decline of funds on the timeline you choose. Time-release funding would overtime ‘release’ your money to be used when you have retired on a set timeline. You could use a three or five-bucket strategy.

The timeline and the number of buckets is your choice and depends on your lifestyle. What works for others may not work for you. 

Three Buckets Retirement Strategy

Examples of using either the three-bucket or five-bucket approach for retirement:

  • 🪣 0-5 years: Bank account/Cash.
  • 🪣🪣 6-10 years: Growing short term investments
  • 🪣🪣🪣 11+ years: Growing long-term investments
  • * timeline is an example; cater it to your timeline*

Five Buckets Retirement Strategy

If you plan on having a long retirement, having more ‘buckets’ may be more beneficial. 

Long-term investments may fluctuate but withstand downturns, and having investments in different buckets will ease your mind that you do not have to rely on only one pool of assets.

  • 🪣 0-3 years: Bank/Cash.
  • 🪣🪣 4-7 years: Conservative assets to sell for cash.
  • 🪣🪣🪣 8-13 years: Growing income investments.
  • 🪣🪣🪣🪣 14-19 years: Growing domestic investments.
  • 🪣🪣🪣🪣🪣20-25+ years: Growing global and small-cap investments (riskier).
  • *timeline is an example; cater it to your timeline*

With both approaches, you now have a timeline of what funds are needed today compared to those required later.

The bucket strategy can be amended and managed throughout retirement to fit your goals and maintain liquidity. This method works for anyone willing to withdraw from investments over time as needed while following the timeline.

It lets you see which assets you will want to liquefy over time, so it won’t surprise you when you need to sell a few assets. It also lets you feel secure knowing that you have other assets that are adequately planned to be sold in the long-term retirement plan.  

Filling Your Retirement Buckets

We will focus on the three-bucket strategy because of its simplicity. 

The first bucket will almost always involve creating a budget for your yearly living expenses and adding more than you think you need as emergency funds. The emergency doesn’t always have to be negative; there may be a one-time event you don’t want to miss, like a concert or a little weekend getaway with your significant other.

This first bucket will most usually always be the same, no matter how many buckets you choose to take from. 

🪣 The first bucket’s uniqueness compared to the others is the low risk and liquidity of assets such as cash, GICs, or bonds. 

🪣🪣 The second bucket could include lower-risk investments like a mix of bond ETFs, dividend-paying stocks and mutual funds. 

🪣🪣🪣 The third bucket would be the most important since it needs the longest growth time. The longer you can leave it alone, the more money you’ll accumulate. You would put higher-risk investments in the third bucket since they can withstand the market’s ups and downs.

Moving Money From Bucket To Bucket

Over time, you must transfer the savings from one bucket to another. If you are not careful, the short-term bucket can get depleted quite often, meaning you must take it from the second bucket. 

There are a few tips and tricks to look out for when transferring funds from one bucket to another. Review your buckets regularly to help you prepare for your upcoming expenses and compare amounts in each bucket. A quarterly review is a good start.

The interest and dividends earned in the second or medium-term bucket can be used to fill the first short-term bucket. This allows you to have a little more room for emergencies and avoid selling your assets in a hurry. Think of the tax free dividends you can earn.

Watch the market. If it’s doing well, then it might be beneficial to sell some of your assets in the third, long-term bucket to refill the second bucket so it can produce more income. 

Try at any cost to avoid selling during a market downturn, especially in your third bucket.

You want to be able to slowly pour money from the giant bucket to the medium to the smallest, similar to a waterfall, so that nothing is ever fully depleted. 

Beware! The Sequence of Returns Risk

Something to keep in mind when creating your bucket strategy is the sequence of returns risk. The sequence of returns risk involves the timing, order and size of your withdrawals. The risk is that you could get a bad return, and for example, if your first bucket is taking a hit in only the first few years after you retire, you will have to sell more investments from the second bucket to make up for it. In that haste, you may end up making a wrong decision; if you see yourself depleting your retirement savings faster than expected, then readjust the plan if you can. 

The longer you can keep your funds invested, the better off you’ll be when you need to withdraw funds because you can also wait and withdraw at a better time. 

If you do end up having a bigger loss than expected in the first couple of years, one easy fix is to reduce the withdrawals you make. Either cut a couple of unimportant living expenses or sell a couple of assets. Avoiding withdrawing your investments when the market is down will always benefit you. 

This is why the bucket strategy is so helpful! You have your first bucket specifically to avoid selling those long-term investments. So be prepared with enough easy-to-sell assets and cash in the first bucket to cover all expenses and maybe a little extra as a cushion. The goal is to ride out the low markets and give them time to recover and generate more and more growth.

Protecting Your Retirement Savings

The bucket approach protects you, first and foremost, from the stock market’s downturns. If you have the chance to enjoy a long retirement, you might even see a few downturns in the market. The downturns that happen toward the end of your retirement, though, may not be as significant since you should have quite a bit accumulated already, but this is not guaranteed. 

The bucket strategy protects your retirement savings by creating a reserve—the savings in the second and third buckets. 

How To Prepare Saving Before Retirement

Starting to save is never too late! The bucket strategy does not have to be only for retirement. You can use the same strategy for any savings goal. 

Here’s an example of the three-bucket strategy:

  • 🪣: Short-term needs. Don’t forget a little extra for emergencies. This is to avoid credit debt. Saving in a high-yield savings account is ideal; you could also create a GIC ladder. 
  • 🪣🪣: Medium-term goals. These could include college or a down payment on a home, among many other goals. Keep your funds in high-quality, low-risk investments, such as dividend stocks. 
  • 🪣🪣🪣: Long-term goals. This is more specifically for your retirement. Investing in stocks and other high-growth investments as early as possible will allow your funds to flow with the market but will continue to build after the downturns. Buying through market downturns can help your wealth grow. 

Retirement Made Easy

Predicting the future is impossible; planning for different contingencies is, however, possible. For example, pretend you go into a downturn during your planning process. What assets will you sell? What expenses will you avoid? 

Keep an eye on the market to prevent starting to save during a downturn. Although your long-term retirement funds may survive, you may still have to withdraw more than expected. 

The bucket approach plans for contingencies to give you peace of mind during saving. 

Protect your future with the bucket approach!