Buckets (Retirement Strategy)

The “Buckets” Strategy is a retirement withdrawal method that separates non-retirement plan assets into three separate buckets.

The bucket strategy relies upon x3 buckets.

Bucket 1 is short term and contains cash and cash equivalents. The total amount in bucket 1 should hold between 1 and 3 years of cost of living expenses.

Bucket 2 is income producing investments.

Bucket 3 is stock, or index based equity investments.

The client meets their short term expenses and liquidity needs using the monies held in Bucket 1.
They will use the income from Bucket 2 to replenish Bucket 1. There is no expectation of capital appreciation for the investments in Bucket 2.
The investments in Bucket 3 are not expected to produce income, and are the most likely to exhibit significant capital growth and inflation protection over the medium to long-term.

This compartmentalized approach to the allocation of risk, and management of liquidity requirements helps to achieve two commonly failed objectives among retirees. First, to have sufficient liquidity at all times to meet discretionary and non discretionary spending needs. Second, to be able to remain invested in equity based investments, which will have swings in value in the short-term, and favorable growth potential over the long-term.

Unlike well known retirement income strategies like the “4% withdrawal method” the buckets strategy is not quantitative and does not provide guidance on the size of withdrawals to be taken, or the optimal mix between asset classes (buckets).

Along with her financial advisor Mrs. client separates her discretionary managed investment accounts into 3 separate accounts.

After discussing her short-term liquidity needs with her advisor it is determined that she should have 36 months of living expenses in Account one. Account one consists of cash, short term CD’s and money market funds (MMF).

For Account two her adviser creates a portfolio of medium duration debt securities, some REITs and some income producing structured products with a tenure of 5 years.

For Account three her adviser uses a core/satellite allocation model with the core being allocated to an SnP500 index tracker, and the satellite being allocated to commodities and real estate. Her adviser sells calls against Mrs. Client’s holdings in the SnP500 ETF to generate extra income in the hope of matching the long-term returns of US equities, but with less volatility.