Your paycheck stops when you retire, but your bills don’t!
You still have living expenses, goals to fund, and a future to protect.
That shift brings new challenges. Markets can drop. Inflation can rise. Surprises happen.
The 3 bucket strategy helps you prepare as part of your overall retirement planning.
It organizes your savings into three parts: one for now, one for the near future, and one for long-term growth.
Each has a clear purpose. Together, they help you stay in control and make your money last.
What Is the 3 Bucket Strategy?
The 3 bucket strategy is a way to organize your retirement savings into three parts, or “buckets.”
Instead of using a single investment account for everything, you split your savings based on when you’ll need the money and how much risk you can take.
- One bucket is for short-term needs
- One is for the next few years
- One is for long-term growth
This makes your plan easier to understand and manage.
The old approach of keeping everything in one portfolio can feel stressful when markets fall and you need to withdraw cash. The bucket strategy gives you more clarity and control. You always know what’s safe, what’s growing, and what’s set aside for later.
That’s why more retirees are using the retirement bucket strategy to manage risk and support long-term retirement planning.
Hypothetical Example: Jane vs. Steve
Let’s say Jane and Steve both retired with $1.5 million. Jane used the 3 bucket strategy. Steve used a single 60/40 portfolio.
Jane set aside two years of expenses in cash, eight years in conservative investments, and the rest in long-term growth.
Steve kept everything in one account and withdrew from it every year.
In year two, the market dropped 25 percent.
Steve had to sell investments at a loss to fund withdrawals. His portfolio shrank faster.
| Jane | Steve | |
| Income | Covered by cash and bonds | Sold stocks at a loss |
| Stress | Slept well | Worried about running out |
| Portfolio | Growth bucket stayed invested | Shrunk faster due to selling |
Jane’s structure allowed her to maintain her plan without needing to react to market events, which may reduce emotional decision-making.
How the Bucket Strategy for Retirement Works
The 3 bucket strategy gives your money a clear job and a clear order.
You start with Bucket 1, which holds cash or other stable assets. This is where you pull money from to cover everyday expenses in retirement.
As that bucket runs low, you refill it using Bucket 2. This bucket holds investments that grow slowly and steadily, like bonds or conservative funds.
When markets are strong, you refill Bucket 2 by taking gains from Bucket 3. This long-term bucket is invested for growth and is left alone for at least a decade.
This system is designed to help you avoid selling stocks when prices drop.
Because your short-term needs are covered, you’re less likely to panic during downturns. You follow the plan instead of reacting to fear.
What Goes in Each Bucket to Meet Your Financial Needs
Each bucket in the three bucket strategy serves a different role. You choose the investments in each based on how soon you’ll need the money and your risk tolerance. This creates a clear asset allocation tied to your time horizon.
First Bucket (Safety Bucket for Years 0–2)
This bucket covers your everyday living expenses in the first few years of retirement. It holds cash and other low-risk income producing assets you can access quickly. Examples include savings accounts, CDs, money market funds, or short-term bonds.
The goal is stability. This bucket helps you avoid selling long-term investments during a downturn. You know your bills are covered, no matter what the market is doing.
Second Bucket (Intermediate Bucket for Years 3–10)
This is your income reserve. It holds investments that can grow moderately while staying fairly stable. Think of investment-grade bonds, conservative bond funds, balanced funds, or dividend-paying stocks.
Income from this bucket is usually steady, even during market downturns. You can use it to refill your short-term bucket without touching your long-term investments.
Third Bucket (Long Term Bucket for Years 11+)
This is where you invest for growth. The assets here are meant to stay untouched for at least a decade.
It typically includes stocks, equity mutual funds, ETFs, or real estate funds. This bucket aims to help you outpace inflation and keep your savings working over the long term.
Why the 3 Bucket Strategy Helps Protect Your Nest Egg
One of the biggest risks in retirement is having to sell long-term investments during a market downturn. If you sell when prices are low just to pay your bills, the losses become permanent.
The 3 bucket strategy helps you avoid that.
Harold Evensky, the financial planner who pioneered the bucket approach, found that having cash available for living expenses during market downturns gave his clients significant peace of mind with their plans.
Since your short-term needs are covered by safe, liquid assets, you can leave your growth investments alone when the market drops.
This structure also creates discipline. You know where income is coming from and how to maintain stable cash flow. That makes it easier to stick to your plan and avoid emotional decisions.
Each bucket plays a role. One provides stability, one offers backup, and one stays focused on long-term growth. The entire structure acts as a built-in risk management system for your retirement income.
Why the Bucket Strategy for Retirement Works for High-Income Retirees
High-income retirees often face more complex challenges. You may have a larger portfolio, a longer retirement timeline, and more tax exposure. That means more risk if your plan is not structured properly.
The 3 bucket strategy gives you a way to manage that risk and protect your long-term portfolio.
You stay invested for the long term, which helps your money keep up with inflation. For some investors, this approach works well with strategies like delaying Social Security or managing taxable withdrawals as part of a thoughtful retirement planning process.
In short, it gives you more control and flexibility in retirement, which becomes more important as your wealth grows.
How to Build Your Own Retirement Bucket Strategy
You do not need a complex system to get started with a retirement bucket strategy. But you do need to be thoughtful about how much to place in each bucket and why.
Here’s a simple way to begin:
- Know your expenses: Add up what you will need to cover each year in retirement. Include housing, food, insurance, healthcare, and extras.
- Fill Bucket 1: Set aside enough to cover the first two years. For example, if you need $60,000 annually in retirement, Bucket 1 would hold $120,000 in cash, CDs, or money market accounts. This protects you if the market falls early in retirement.
- Build Bucket 2: Save enough for years three through ten. Use conservative investments that provide income and some growth. This bucket will refill Bucket 1.
- Invest in Bucket 3: Place the rest in long-term investments. You will not need this money for at least ten years, so it can stay invested.
- Check your plan each year: Review your spending and rebalance as needed.
Working with a fiduciary financial advisor can help you adjust this strategy to fit your goals, lifestyle, and expected cash flow needs.
Protecting Against Inflation and Market Downturns
Retirees worry about rising prices and falling markets. The retirement bucket strategy helps address both.
Bucket 3 holds long-term investments that have the potential to outpace inflation over time. This helps protect your buying power over a retirement that may last decades.
Buckets 1 and 2 help protect your short and medium-term needs from market volatility, so you do not need to sell stocks during a downturn.
As you spend from Bucket 1, you can refill it from Bucket 2. When markets are strong, you refill Bucket 2 from Bucket 3.
A thoughtful withdrawal plan can also improve tax efficiency. Be sure to consult a qualified tax professional before making any tax-related decisions.
Is the 3 Bucket Strategy Right for You?
This strategy may work well for people nearing retirement, high-income earners who want structured withdrawals, and anyone who wants more peace of mind.
It helps you manage risk, maintain predictable cash flow, and stay organized.
If you are ready to create a strategy and take the next step in your retirement planning, talk to a financial advisor.