The bucket strategy is a simple, intuitive way to draw retirement income while managing market risk. Here is how it works.
How the three-bucket strategy works
The bucket strategy splits your savings into three buckets based on when you will need the money. Bucket one holds one to three years of spending in cash and equivalents, your immediate income source. Bucket two holds three to ten years of needs in bonds and conservative investments, providing stability and moderate growth. Bucket three holds long-term money in stocks for growth to outpace inflation. You spend from bucket one, then periodically refill it from buckets two and three. The core benefit: in a market downturn, you draw from cash instead of selling stocks at a loss, protecting your long-term growth.
Why the bucket strategy reduces risk
The bucket strategy's main advantage is psychological and practical defense against sequence-of-returns risk, the danger of early market losses combined with withdrawals. Because you hold one to three years of spending in cash, a market drop does not force you to sell stocks at low prices; you simply spend from cash and let the stock bucket recover. This helps your portfolio last longer and helps retirees stay invested during scary markets rather than panic-selling. The tradeoff is that holding cash can slightly lower long-term returns, but many retirees find the stability and peace of mind well worth it.
Add a healthcare buffer to your buckets
Smart bucketing includes healthcare. Unexpected medical bills can drain your cash bucket fast, forcing you to sell investments at a bad time. Original Medicare leaves gaps with no out-of-pocket maximum. A Medigap plan turns variable medical costs into a fixed premium you can plan around in bucket one. Call 1-800-MEDIGAP at 1-800-633-4427 to keep medical surprises from disrupting your buckets.