How to Implement the Bucket System in Retirement

 I’m a big fan of buckets. I even go so far as to manage my income in buckets and I wrote about my obsession here. Having money in different places for different purposes is a natural budget and helps you apply discipline to your spending. It also helps lower the stress level.

As the Kiplinger article notes having buckets of money that provide your retirement income is a good way to manage the variables you face.

Living on a pension as I do I can only imagine the day to day concerns that one can face starting retirement with a pot of money and then trying to manage it, pay the bills, enjoy retirement and not run out of money when you don’t know how long the journey will last.

Most people know that investing at regular intervals means you buy more shares when the market is low and fewer when the market is high. In retirement, you’re making systematic withdrawals, which is the evil twin of dollar-cost averaging: You’re selling more shares when the market is low and fewer when it’s high. Each withdrawal exacerbates the decline when a fund falls in value and reduces the gains when the fund rises. In a severe bear market, pulling money from a tumbling fund can be catastrophic.

The bucket system is designed to keep you from doing just that. You divide your retirement money into three buckets: One is for cash that you’ll need in the next year or two, including major expenses, such as a vacation, a car or a new roof. The next is for money you’ll need in the next 10 years. The final bucket is for money you’ll need in the more distant future, either for you or your heirs. The bucket system “gives you the confidence and peace of mind to stay the course,” says Jason Smith, author of The Bucket Plan: Protecting and Growing Your Assets for a Worry-Free Retirement.

Source: How to Implement the Bucket System in Retirement | Kiplinger


  1. I am not a fan of buckets. Buckets may be suboptimal, an unnecessary, perhaps complex impediment to retirement preparation and retirement spending.

    Bucket lists for retirement are not solely about places to see and things to do.

    Some financial experts recommend buckets for investment and spending in retirement.

    Others recommend buckets for investment and saving in preparing for retirement.


    Investment and Spending in Retirement

    Volatility is not predictive of market swings – up or down.

    This again is of interest as we acknowledge the 2008 financial storm and the 2020 COVID disruption. Those who were in their 50s during the Great Recession may be considering retirement today. Many are concerned about retiring in a down stock market. Many are invested in 2020 target date funds – some of which still have 55-60 percent equity allocations.

    Others are concerned about sequence of returns risk.

    To counter those challenges, some financial experts recommend a bucket approach for retirement savings, preparation, investment, and spending. A bucket you say? Yes, this is a case in which you set aside a few years’ worth of spending in cash or fixed income investments then invest the remainder of the portfolio more aggressively. So, when an investment portfolio suffers a market correction, a retiree uses money from the cash account – so the investment portfolio has time to recover.

    Consider year-over-year percentage changes in S&P 500 investment performance:

    2008 -37%
    2009 26.46%
    2010 15.06%
    2011 2.11%
    2012 16%
    2013 32.39%
    2014 13.69%
    2015 1.38%
    2016 11.96%
    2017 21.83%
    2018 -4.38%
    2019 31.49%
    2020 18.40%

    When the market correction occurred in 2008, it took more than four years to fully recover – and only for those who stayed invested in equities, those who stayed the course.

    The bucket approach can also be implemented using mental accounting. You allocate/separate assets based on their specific purpose/need.

    Buckets are popular, feel good and plausible. It is easy to implement and it reduces anxiety. But, it may be suboptimal – in both the accumulation and the decumulation phases:

    “The evidence shows that a bucket approach underperforms static strategies. However plausible, comforting, consistent with mental accounting and easy to implement the bucket approach may be, simple static strategies, with periodic rebalancing, are just as easy to implement and leave retirees better off.”

    Just as important, there is significant upside potential from using a “total return” approach.

    Investment and Saving in Retirement Preparation
    A bucket approach or envelope savings system for retirement preparation is an ultra-complex process for the accumulation phase.

    First, you have to identify all of your savings goals.
    Second, you have to identify how much money you must have for each need, which also involves projecting future prices and inflation.
    Third, you’ll have to identify when you will need those monies.
    Fourth, you will have to identify and select the right “envelope” (savings vehicle), since some investment options have access and penalty limits.
    Fifth, you’ll have to decide on an investment strategy for each need.
    Sixth, you’ll have to evaluate, no less frequently than annually, your progress regarding achieving each goal.
    Seventh, you’ll have to adjust your savings rate and/or adjust your investment allocation for any overage or shortcomings.

    And then, what if your goals for savings change? What if “they” “move the goal posts” without asking your permission (such as raising taxes, curtailing Social Security benefits, etc.)? What if you change employers or your employer changes their retirement savings plan’s provisions?

    Most importantly, what if you are living paycheck-to-paycheck, so that at the end of each month, before you get to the retirement savings bucket or envelope, all you have left are bills?

    For some, perhaps many, Mik has it right – aggregate/consolidate savings, avoid the bucket!

    Note: Some retirement experts use the term “bucket” to separate retirement assets by tax status – Roth (401(k), 403(b), 457(b), IRA), tax deferred (401(k), 403(b), 457(b), IRA), after tax (401(a), employer contributions (401(a)), tax preferred (e.g., Health Savings Account, 223) and taxable (e.g. brokerage, banking, etc.) Each has a different tax treatment – both in terms of the contributions and the distributions. I use/prefer the term “source” to differentiate these various retirement assets. So, when saving and spending retirement assets, incorporating consideration of the tax treatment for each source is important – for both the contribution and the distribution, as well as the impact on the investment portfolio.


  2. Point taken…my personal experience with specific buckets is that life doesn’t fall into specific prices i.e. taking from one bucket to help pay another…so I just use one bucket called savings…genius.


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