For most of our lives, retirement is seen as a destination. It’s a place we get to at the end of our careers after lots of hard work and dedication, after ups and downs. A place we can finally take a deep breath and relax.

The problem is, retirement isn’t really a destination. It’s a milestone, a stop along your journey that’s hopefully buoyed by the hard work you’ve done — and maintained with a good financial strategy.

What this all means is that your financial management and execution still needs to happen after you retire. And if it’s not done properly, without a lot of forethought and strategy, where you thought your finances would be when you turned 85 could look a lot different than you thought they would.

One popular way to look at managing your finances upon retirement is with the 3 Bucket Strategy. Three is a nice, easy number to work with and we’ve found great success with this strategy with our clients.

What Is the Bucket Strategy?

The Bucket Strategy creates a way for people to easily allocate various funds and investments into clearly defined subsets, called “buckets” — cash, income, and long-term growth — that outline when and how you’ll withdraw funds throughout your retirement. 

This strategy defines how you’ll divide your retirement portfolio into these different buckets along with carefully defined & structured transfers between those buckets to sustain them over time.

The 3 Buckets

Now, let’s look at what each bucket is, why it exists, and what it does for your retirement strategy.

1. Cash Bucket

As the name suggests, your first bucket is your bucket filled with readily available liquid assets. 

The Cash Bucket should aim to have between two to three years of cash that can cover your spending needs and requirements that aren’t covered by any other forms of income (think pensions, social security payments, etc).

This money could be in the form of actual cash, short term bonds, and/or money market funds.

The goal of this bucket is to provide you with enough money to get you through the present moment and the next couple years in front of you. This cash also helps you avoid having to sell stock or other investments to get you through a tough economic time or economic downturn.

It’s estimated that it takes about three years for markets to return to their pre-crash highs. Thus, your cash bucket will sustain you through those economic lows. This provides stability and protection to your investments during retirement.

Before you retire, you’ll want to have enough saved to cover your spending & expenses with a withdrawal rate ranging from 3 to 4 percent. For example, if you have $1 million saved for retirement, you’d withdraw between $30,000 and $40,000 per year. 

Let’s say you withdraw $35,000 per year. This means you’d want to have between $70,000 to $105,000 in your cash bucket.

2. Income Bucket

This second bucket, your Income Bucket, aims to generate more income. It’s this income that will help “refill” your first bucket as your retirement years continue on. 

Because you will need this income to refill your first bucket, you don’t want your investments, bonds, mutual funds, etc. to be too risky.

There’s always some risk involved with investments like this, but focusing on conservative stocks, high yield securities, long-term CDs, and more balanced mutual funds allows you to keep up with inflation, stably earn income, and reduce your risk of loss. 

The Income Bucket should represent between seven to eight years of spending needs for you. 

Going back to our example from earlier with someone requiring $35,000 per year, that would result in an Income Bucket that should be worth between $245,000 to $280,000.

3. Long Term Growth Bucket

Your Cash Bucket represents no risk with no real return. Your Income bucket represents small risk with some small (but impactful!) returns.

Our third bucket, the Long Term Growth Bucket, takes it home with high risk and potential high returns.

This bucket is one that you shouldn’t touch for 10 or more years post-retirement. This means that those funds can be used for longer term investments that can grant you larger returns to eventually trickle down through your Income Bucket and, eventually, refill your Cash Bucket.

The most common investment is stocks. Stocks may be able to outpace inflation in the long term, which is great for this Long Term Growth Bucket. 

These investments will provide you with inflation beating returns in the long term to sustain your other two buckets throughout your retirement.

Creating and Implementing the Bucket Strategy

While the bucket strategy is (we hope) relatively straightforward to follow, executing it to fit your needs in retirement is another thing.

Working with a professional financial advisor gives you a knowledgeable resource to help:

• Analyze your needs & goals
• Craft a strategy to align with your wants & needs
• Guide you through the implementation of that strategy

Give us a call and we’ll start off with a conversation about your financial situation and goals. We’ll talk about what you’re looking for, what your current retirement plan looks like, and how we can work together to make it to reach your magic number and your World Series.

All investing involves risk including the possible loss of principal. No strategy assures success or protects against loss.