How To Refill Your Buckets in Retirement

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In January, I was honored to speak about The Bucket Strategy at a CampFI event in Florida.  Today, I’ll be sharing a portion of my presentation on “How To Refill Your Buckets in Retirement,” based on my experience through 8 years of retirement. 

As proof, here’s a photo of me presenting one of the slides you’ll read about in today’s article:

“Professor Fritz” teaching The Bucket Strategy at CampFI

This is the 5th article in The Bucket Strategy Series. Links to all of the posts are below: 

Programming Note:  I will also be writing an article on “The Strategic Advantages of The Bucket Strategy” as my next post.  As I’ve worked with the strategy, I’ve come to appreciate some important strategic advantages that I’ve never seen published (For example, it results in a Reverse Glide path, which I’ll touch on today). Look for that article next month.  

Also, I should clarify that I’m not trying to “sell” The Bucket Strategy.  It’s one of many ways to create a “retirement paycheck,” and it’s worked well for me. The important thing to consider is which elements of this strategy resonate with you. Consider how those elements fit into the strategy of your choosing. The important thing is to have a plan that works for you.  I hope this series is helpful as you consider what system you’ll design for your retirement.

Today, we're taking a look at How To Refill Your Buckets, based on my 8 years of experience using The Bucket Strategy. Share on X

how to create a retirement paycheck

How To Refill Your Buckets in Retirement

I’ve been using The Bucket Strategy since I retired in 2018, and it’s worked well for me.  It takes me less than an hour per year to manage it, and I expect to continue using it for years to come. One of the “hacks” I’ve found is to link each line in my Net Worth Statement to its corresponding “Bucket” in a separate tab in my spreadsheet. When I update my Net Worth, I get an instant update on the status of each of my buckets. 

Some have argued that the Bucket Strategy is too complicated to manage, but I’ve found the opposite to be true. Having links to my net worth makes it easy to compare my year-end balances to targets for each bucket, make the appropriate spending revisions, and rebalance, as I’ll present below.

Before we proceed, it’s important to note:

  • Bucket 1 and Bucket 2 are time-based (Years of Spending)
  • Asset Allocation is a result of, rather than a driving factor for, the annual rebalancing process.
  • Read those two bullet points again; they are extremely important.

How To Refill Your Buckets

Below, I’ll provide a series of slides from my CampFI presentation that illustrate how the refilling process varies based on the previous year’s market results. 

First, an important assumption regarding annual spending:

For simplicity, spending is assumed to be “flat” in the scenarios below.  To account for inflation, you can (and should) increase spending assumptions annually.  I use a Safe Withdrawal Rate calculation to ensure the spending increase is within my guidelines. Check out A Step-By-Step Guide For Your Annual Financial Update for details.  Once I know I can afford the increase, I adjust the buckets accordingly.

When you increase spending, you must increase the $ amount targets for Buckets 1 and 2, since both are intended to cover 3- and 8-year’s spending, respectively.  For example, Bucket 1 should be adjusted as follows:

  • Original Target:  $150k (3 Years of spending @ $50k)
  • Revised Target: $180k (3 Years of spending @60k)

With that assumption understood, let’s get started with the illustrative overview of the refilling process:

Starting Position At Retirement

At the start of retirement, a common Bucket Strategy setup for a $1.5M portfolio is shown above.  With $50k of annual spending, the retiree has established an opening position with 3 years of cash in Bucket 1 ($150k), 8 years in Bucket 2 ($400k), and the remainder in Bucket 3.   Take note of the Asset Allocation, we’ll be discussing how that evolves.  For simplification, we’ll assume Bucket 1 is Cash, Bucket 2 is Bonds, and Bucket 3 is Stocks:

Asset Allocation – Opening Position:

  • Cash 10%
  • Bonds 27%
  • Stocks 63%

End of Year 1 – “Typical Year” (Before Rebalancing)

Year 1 represents a “Normal” year in the market, with returns of 10% for stocks, and 3-4% for cash/bonds.

At the end of the year, you can see $50k of spending has been withdrawn from Bucket 1.  After factoring in market returns, Bucket 1 is below the 3-year spending target by $46k ($104k actual vs. $150k target), and Bucket 2 exceeds the $400k (8-year spending) target by $16k.  Bucket 3 has grown from $950 k to $1.05 M with a stock market return of 10%. It’s important to note that the entire portfolio has grown by $60k, from $1.5M to $1.56M.

Year 1: Rebalancing Strategy

We need $46k to refill Bucket 1 cash back to its 3-year spending target of $150k.  (Note that we use “Years of Spending” as our metric for rebalancing Buckets 1 and 2, NOT an Asset Allocation target).  This “Time Segmented” approach to rebalancing is a critical element of The Bucket Strategy. 

To refill Bucket 1’s $46k shortfall, we…

  • Move $16k from Bonds to Cash  (Bucket 2 to Bucket 1)
  • Move $30k from Stocks to Cash (Bucket 3 to Bucket 1)

After rebalancing, we’re back at our target with 3 years of cash in Bucket 1, 8 years of bonds in Bucket 2, and the remainder of stocks in Bucket 3.  Note that our Asset Allocation is a result of, and not a driver for, our rebalancing decisions. Using the “Years of Spending” target to rebalance Buckets 1 and 2 results in the following Asset Allocation at the end of Year 1:

Asset Allocation – End of Year 1

If you extrapolate the 1.4% increase in stock allocation for year one, the effect can be significant over time.  I’ve seen it firsthand, with my stock allocation increasing to 72% since my retirement in 2018 (driven by the above-average equity returns).  Despite the higher allocation to stocks, I feel confident about my risk exposure to a market downturn, as I still have 11 years of “protection” in Buckets 1 and 2. 

That’s been one of the biggest realizations I’ve had after using the strategy for 8 years.  The higher exposure to equities also increases my protection against longevity and inflation risk.  It’s a real-life example of the reverse glide path in action, and I’m pleased with the unexpected benefit of using The Bucket Strategy.

End of Year 2 – A Bear Market (Before Rebalancing)

In Year 2, spending remains steady at $50k, but the 15% decline in stocks drove a Net Worth decline of $180k (from $1.56M to $1.38M).  If you look at the Asset Classes, you’ll see the cash and bonds had positive returns, but insufficient to offset the stock losses.  And yes, I know a Bear Market is technically a 20% decline, but I’m assuming the bear happened mid-year and the year-end result was 15%.  If you don’t like my approach, feel free to run your own numbers. Wink.

Year 2: Bear Market Rebalancing Strategy

As in year one, we have a $46k gap in Bucket 1 due to our spending.  Since Bonds were up $16k, I’m confident using that as a partial refill of Bucket 1.  However, given the stock market decline, I want to avoid selling stocks. The Bucket Strategy is designed for exactly this type of situation.  I’ve still got plenty of “liquidity cushion,” so there’s no need to panic.  As a result, we’ll finish our rebalancing with “only” $120k in Bucket 1, dropping our protection from 3 years ($150k) to just under 2 1/2 years ($120k), knowing we can also tap Bucket 2 if the bear market continues.

After rebalancing, our Asset Allocation is as follows:

Again, the Asset Allocation is a result of, rather than a driver for, our rebalancing moves.  Our priority is to maintain as much of our 11 year buffer as possible in Buckets 1 and 2, so I’m confident with the slight decline in the allocation to stocks in return for maintaining the liquidity buffer, while also avoiding the sale of stocks after a downturn.  The priority for our retirement portfolio is to protect our spending via Buckets 1 & 2, not to take advantage of every opportunity to “buy the dip.”  We can debate the approach in the comments, but you must define your priorities for any system you put in place to create your retirement paycheck, and the priorities are clear in my mind. 

Goal: Protect your liquidity buffer to the extent possible, while also avoiding selling stocks after a downturn.

End of Year 3:  A Bull Market

Thankfully, the markets recovered in Year 3, with stocks earning a 20% return for the year.  Even with our $50k of spending, our portfolio increased 11% from $1.38 M to $1.53 M.

Year 3: Bull Market Rebalancing Strategy

Since we only did a “partial refill” of Bucket 1 last year, our gap is now $77k ($73k Actual vs. $150k Target).  Fortunately, the market recovery has provided the means to do a full refill, which we’ll accomplish as follows

  • Move $16k from Bonds to Cash  (Bucket 2 to Bucket 1)
  • Move $61k from Stocks to Cash (Bucket 3 to Bucket 1)

After rebalancing, our Asset Allocation is as follows:

If you compare Year 3 to our starting position, you’ll notice we still have 11 years of protection in Buckets 1 & 2, but they are a smaller % of our overall allocation (combined, they represent 36% of the portfolio vs. 37% at the start of retirement).  This is driven by the fact that both buckets are Time Segmented (3 years and 8 years, respectively). 

Since Buckets 1 and 2 “fixed” using a time-based methodology, the growth in the overall portfolio (from $1.5M to $1.53M) falls into Bucket 3, increasing our allocation to stocks.  This phenomenon will occur any time market returns exceed your Safe Withdrawal Rate over time, as has happened since my retirement in 2018.  Following is a summary of S&P500 returns since my retirement (Source: Google Search):

Key Annualized Total Returns (S&P 500):
  • 2018: -4.4% 
  • 2019: +31.5%
  • 2020: +18.4%
  • 2021: +28.7%
  • 2022: -18.1% 
  • 2023: +26.3%
  • 2024: +25.0%
  • 2025: +17.9%

Given the above average returns since 2018, my stock allocation now represents 72% of my portfolio. I’m a conservative investor, but am comfortable with the higher stock allocation given the fact that I still have 11 years of “protection” in Buckets 1 and 2. Further, I have less anxiety about longer-term risks (longevity and inflation) given the higher allocation to the asset class most likely to mitigate those risks.

The reverse glide path in action.  Michael Kitces would be proud.

In contrast, a straight “60/40” approach would increase the total bond $ holdings to more than the 8 years of time segmented protection I’m seeking.  Assuming market returns exceed SWR over time, the bond portfolio would increase in $ value as the 40% allocation is maintained, which would lead to an increasing “years of spending” in Bucket 2. One could argue that the 60/40 is “easier” (thinking of you, Rob Berger, wink), but I would argue that it results in a more conservative portfolio than necessary over time, leading to increased longer-term longevity and inflation risk than would be realized if the stock allocation absorbs the entire portfolio growth.  Speaking of Rob, he makes some strong arguments, which I’ll address in more detail in my next post, “Strategic Advantages of The Bucket Strategy.”  He also asked anyone who is using the Bucket Strategy to explain their rebalancing logic.  I hope I addressed that with today’s post, Rob (I enjoy and respect your work). 

Yeah, But What If…

I can read your thoughts.  Most of you are thinking, “Yeah, But What If….”

It’s a common response to retirement planning. I know the anxiety we all face in the final year before retirement (I wrote about it here).  I encourage you to avoid Analysis Paralysis and pick a strategy that will handle the vast majority of scenarios you’re likely to encounter. For me, that’s The Bucket Strategy.  Each of us must decide for ourselves what we’re comfortable with, but decide we must.

We could design 1,000 different scenarios using the methodology shared above.  If you have a scenario you’re worried about, model it.  It’s not hard, just build a spreadsheet and play around with as many scenarios as you’d like.  It’ll take you less than an hour.  I’m confident that The Bucket Strategy is flexible enough to handle most market volatility.  Sure, if we end up with a stock market crash like 1929, it’ll be strained.  5 years of a bear market? Sure, it’d be brutal.

Show me a strategy that wouldn’t be impacted in that environment. 

Let’s hope we never have to experience that in our retirement.

Conclusion

For me, the Bucket Strategy has provided the flexibility to handle volatile markets, spending modifications, and ease of implementation. In my experience, it’s easy to manage, easy to understand, and offers peace of mind.

That said, the reality is that it’s a blend of a Time Segmentation strategy (Buckets 1 and 2) and a total return portfolio, which makes it a bit difficult to comprehend (vs. a straight 60/40 rebalancing approach).  Given that my priority is to protect 11 years of spending outside the stock market, it makes sense to me.  Simply check your year-end balances to see how much refilling is required to build your time-based protection, and get on with living.

For me, retirement is about enjoying life while spending as little time as possible managing our portfolio.  The Bucket Strategy accomplishes both.  I’m sleeping well at night, spending less than 20 hours/year managing our portfolio, and getting weekly hikes in the mountains with my dog.

Life is good.

Finally, the Bucket Strategy also offers an unexpected wealth of strategic advantages.  I originally included a section addressing them in this post, but due to length, I decided to strip it out and dedicate an entire article to that topic.  Stay tuned…

* Minor point:  When I do mid-year refills, I do look at the Asset Allocation compared to year-end values to determine which asset class to draw from (if stocks have grown more than bonds, I’ll use stocks).  More importantly, during my full annual review process, the Asset Allocation is the result of (vs. the driver for) rebalancing, as outlined throughout this post.  Prioritizing the Time Sequence methodology for Buckets 1 and 2 is the important part to remember. 

Your Turn:  How do you manage your portfolio to build a retirement paycheck?  If you’re using the Bucket Strategy, has this article helped give you ideas for how to manage your annual rebalancing process?  Let’s chat in the comments…

 

92 comments

  1. It still sounds like trying to time the market: deciding whether to sell bonds or stocks and how much of each, based on what the market has done recently. My strategy is ultra simple–keep everything in a broad-based stock fund and take out what I need each month. The withdrawals vary based on my life, not the market (never taking more than 5% a year). That’s it. It appears that the best financial returns, over the long term, is stocks. So that’s where I keep my money.

    1. Marty, that’s why they call it “Personal” Finance, right?

      To me, it’s “rebalancing” rather than “market timing,” and it provides a methodology to avoid making major mistakes, sell asset classes when they’re up, and avoid selling stocks when they’re down.

      Your strategy may be ultra simple, but it also comes with a lot of risk (Sequence of Return Risk, primarily). Everyone has to develop their own strategy to match their risk profile, and I’m good with that! Thanks for your comment.

      1. I’m on my second year of retirement using the bucket strategy. I love it! It works great for me. It protects me from sequence of return risk which is critical. Especially retiring early at 55. Thank you Fritz for all you do to teach. Your blog was a huge blessing to me in planning my early retirement. 🙏

  2. Clear description as usual, Fritz. Thank you. I use buckets, though not with such clarity. My TSP has boomed, and I’ve been pulling from that to supplement pension and remove some of risk of future RMDs that override tax planning. The TSP just allows proportionate withdrawals – if I’m 10% bonds, 10% of withdraw is from bonds. Not bad, but the lack of control (and desire to simplify my total accounnts) has me moving the TSP to my Vanguard IRA. My bucket challenge is I really don’t have a lot of bonds, so I count REITs as part of bucket 2. High dividends, not too volatile. The other thing I’ve noticed is my future year buckets have gotten smaller, since the need will decline once SS begins. I might have to start a non-profit!!

    1. KevG, ironically, I made the exact same move out of my 401k and into my VG IRA, for exactly the same reason. That “proportionate withdrawal” makes it much more difficult to manage a retirement paycheck. It’s also MUCH easier to do Roth conversions from the VG IRA (vs. the “old” 401k): 5 minutes online vs. Snail Mail Forms when in the 401k.

      I agree with your logic for counting REITs in bucket 2. It’s the same bucket I have them in, as outlined in my original post in this series. Finally, I’m in 100% agreement on the SS impact for bucket size, and am looking forward to receiving those SS checks in seven years.

      Finally, if you want to start a non-profit….I know a guy. 😉

  3. Great explanation of your bucket strategy young man! You are a numbers man, as am I, but I can see where someone may read it and think it is too complicated. With that, is there anyone else out there who may have followed my strategy?

    We built income streams to pay all of our monthly bills with over $1,500 to spare at times. We currently have 6 paychecks and 5 of them are for my lifetime. When I pass, my spouse will be down to only 2. Because we don’t withdraw from our 55/45 portfolio, our net worth has increased very nicely. She will not have any issues with scarcity, as Fidelity and Boldin programs give me confidence.

    We plan on increasing our gifting to charity and family, as we know we are blessed beyond measure.

    Is there anyone that has built steady income streams to handle all of your retirement expenses?

    When you give with an open hand, leave it open and God returns it ten fold. I live this and I assure you it is true. Blessings to the Gilbert family and all of you.

    1. Steve, interesting scenario, thanks for sharing. I like your focus on “increasing our gifting to charity and family.” We’ve done the same over the past few years (and have been blessed with some of that “ten fold return”).

      As for “building steady income streams, annuities come to mind as a tool to also accomplish that goal. I’d be interested to hear from readers who have purchased an annuity. It’s a reasonable tool that too often gets disregarded due to past reputational problems, but I think they’re a viable option for some folks now, as long as you do your homework before buying one. Thanks for the question.

      1. Hi Fitz,

        I always enjoy your perspective. My wife and I do have income annuities, that along with Social Security, cover all of our living expenses other than travel. We do take IRA withdrawals monthly which cover the travel portion of our expenses. We have an online savings account that we fill yearly and maintain 3 years of our expected travel in case of any market downturns. So far it’s worked great for us and we like knowing all of our living expenses are covered with guaranteed lifetime income. Keep up the great work!
        Mike

        1. Thanks for weighing in. I’ve always felt that was a viable option, surprising how few people actually do it.

      2. 1) When purchased via after-tax brokerage money, you’re trading the flexibility and more favorable long term capital gains tax rates for a boatload of restrictions/rules and taxation at the less favorable regular income tax rates. In addition, there’s no “stepped up” cost basis for heirs. Heirs inherit the original cost basis for the annuity and the cost basis is the last money to come out of the annuity when monies are disbursed. Therefore the initial funds withdrawn by heirs is fully taxable income. Heirs have to deal with both annuity rules and IRS rules. Inheriting a brokerage account without an annuity means a simple stepped-up cost basis and change of ownership and no need to liquidate the brokerage money within a relatively short period of time.
        2) Loss of flexibility in choosing how the annuity money is invested. With a straight brokerage account that has no annuity, there is far more investment flexibility.
        3) Much higher front-load commission and overhead costs taken out of an annuity versus the much cheaper option of paying 0.03-0.04% for a total market or S&P500 ETF or index mutual fund.

        In my opinion, those with a decent to fat retirement nest egg shouldn’t need an annuity as long as they have a retirement spending plan that’s designed to make their money last throughout their lives.

        Now I know someone who has bought an annuity within a pretax IRA and I think the main reason was to lower the husband’s RMD load without taking a large taxable distribution. The couple in question have fairly frugal spending habits, no debt and a generous nest egg that I don’t see them spending down in a big way before they die. Of course then their son in a high middle class income bracket will inherit a tax trap whereby he’ll have to withdraw the entire IRA portion within 10 years after their death.

        I personally have been focusing on annual Roth conversions to reduce my pretax money in order to lower my eventual RMDs and avoid IRMAA along the way. I will never buy an annuity. The way I look at it, Social Security functions like a type of annuity, and that’s all the guaranteed income I need given my more than adequate savings nest egg. I can see where a guaranteed lifetime income annuity can give someone some peace of mind if they have a big fear of going broke before they die, but they do need to know what they are getting into.

  4. I think the bucklet strategy over complicates one’s retirement strategy. I understand what it does but I’m doing the same thing by having a 60/40!portfolio. The bonds are for stability.Dan I rebalance once a year. When the market tanks, I can pull from bonds if needed as rhey most likely have not declined. I also set up an 3 month emergency fund (in case the furnace goes out). Anyway – it works for me. Simpler and effective.

    1. Same here Mike, and I find it much simpler to make withdrawals as needed and re-balance semi-annually.

      1. Agreed. Rob Berger has an excellent video of why the bucket strategy is flawed. https://www.google.com/search?q=rob+berger+bucket+strategy&rlz=1CDGOYI_enUS596US596&oq=rob+berger+bucket+strategy&gs_lcrp=EgZjaHJvbWUqBwgAEAAYgAQyBwgAEAAYgAQyBwgBECEYoAEyBwgCECEYoAEyBwgDECEYoAEyBwgEEAAY7wUyBwgFEAAY7wUyCggGEAAYogQYiQUyBwgHECEYjwIyBwgIECEYjwLSAQg5OTMxajBqN6gCGbACAeIDBBgBIF_xBX2-FfEnB0SL8QV9vhXxJwdEiw&hl=en-US&sourceid=chrome-mobile&ie=UTF-8#fpstate=ive&vld=cid:f1185344,vid:fNP62fSLg1U,st:0

        1. How ironic! See my comment below about this video having influenced me. This was exactly the link, thanks for sharing. I agree that the 60/40 is an entirely feasible approach to building your retirement paycheck, and offers similar protection. I’d be lying if I said I haven’t considered moving to it at some point in the future.

          Between the two, there’s no wrong answer. They both work.

    2. Mike (and all of the others who will say “60/40 IS BETTER”),

      I totally understand your opinion. In fact, I’ve been swayed by Rob Berger’s YT argument for exactly that. For now, buckets work for me, but I have to admit the pure simplicity of the 60/40 offers very similar protection. I would never disagree with someone who chose that route as a viable way to build your retirement paycheck, it’s legit.

      Great discussion.

      1. Fritz, I think the biggest argument I have for keeping it simple is if you’re a DIY’r – complexity can be the enemy as we get older. I’m only 64 but want to be sure my strategy isn’t overly complex as I age. I really think the bucket strategy will work but with the 60/40 – it works. Appreciate your candor!

        1. Great point about cognitive decline. I actually hadn’t thought about that wrt The Bucket Strategy, but there’s no doubt a straight 60/40 would be easier to manage with diminished acuity. I may have to think about that in a few years…

        2. I personally don’t find the bucket any more complex than the 60/40. And I’m only 78. Allocation, location and security selection is the more complicated part. I have been training my daughter for years to be my backup when needed. And that also provides a great foundation for when she inherits my portfolio.

    3. What fund did you pull from in 2020 when both Stocks and Bonds were down? I have 5 years of cash in Bucket 1 for down years. I don’t care about cash drag. Its better not to have to withdraw from Stocks and/or bonds in a 20-30% down year. We don’t need to quadruple our net worth. We just need to keep what we have. In retirement, I just need to beat inflation.

      1. Bob, I have some individual stocks from my “fun account” at Schwab, fortunately one of them was counter-cyclical and performed well in 2020, so I used that to top off Bucket 1. If necessary, not worried about having Buckets 1 & 2 decline for a few years, better than selling stocks after a downturn IMHO.

    4. Yep. Rob Berger had a nice short video on the reality that the bucket strategy necessitates timing the market. Better to just keep everything in the portfolio and withdraw what you need in from either bonds or equities that results in a rebalanced portfolio. So much simpler that way.

  5. I have been using the bucket strategy since first exposed to it by Christine Benz at Morningstar a number of years ago. I do target to %s in each bucket but they are based on years of cash flow. I too link it to my net worth statement or asset list. Using %s also helps me with asset allocation between equity classes of large cap, small cap and international. At age 78 I am very comfortable with my 65-35 stock-fixed allocation. My bucket 1 is about 6 years of spending and is a mix of cash and short-term bonds. Bucket 2 is intermediate term bonds and TIPS and is about 12 years of spending. I find the buckets a great visual aid to looking at overall financial picture. I retired in 2003 so had to live through the implosions of 2008 and 2022. Not pleasant, but not traumatic either. The weakness for me is that most of bucket 1 is in my Traditional IRA which leaves me potentially short of cash for larger emergency needs without having to withdraw more than my RMD.

    1. “I too link it to my net worth statement or asset list.”

      Quit stealing my hack! 🙂 Glad to see someone who has been using it for 23 years agrees it’s a helpful model to design the retirement paycheck. I get the “Tax Location” problem (Traditional IRA), seems that gets more likely as we consume the taxable first, but realistically you’ll have to deal with RMD’s anyway, so it really doesn’t hurt to go ahead and do a taxable IRA withdrawal as required.

  6. What bucket variation would you suggest for those of us who also have significant pension/Social Security/annuity income? All my regular spending is covered. In fact, I am building us extra cash every year. What to do with my portfolio? Currently, I am 50% equities, 50% cash/equiv.

    1. The Buckets are only designed to cover the “Gap” between known income and spending. With no gap, there’s really no need for you to bother. Just go with a straight 60/40, and count your blessings for having all of your spending covered by guaranteed income. Well done.

      And….consider increasing your spending / gifting. It sounds like you’re in great shape, there’s no need to be contributing to savings at this stage.

      1. IMO, if your spending is covered by guaranteed income, there is no need for having a 60/40 or 50/50 portfolio. This is now for your future generation. If I was in your position I would go 90 stocks/10 bonds or fixed income and let it ride..

  7. Great article, Fritz! I do have a suggestion though about sizing the Buckets for 1 and 2. The amount is actually Required Withdrawals = Expected Expenses – Fixed Income. I’m entering the second decade of my 3-bucket strategy that began when I was unexpectedly retired just before turning 59. A cash cushion allowed me to crash-land my retirement and evolved into Bucket 1 of our retirement portfolio. I too have had a rising equity portfolio, especially as a small pension kicked in at 65 and starting next year when I will turn 70 for Social Security. I explain the 3 Keys of my Bucket Strategy on my YouTube channel here: https://youtu.be/FY0wYEe6nxM

    1. Jim, excellent addition! Ironically, I just explained that in the comment above, should have included that clarification in the post. Thanks for adding value to the discussion.

  8. Love the bucket strategy! Would you speak to those of us with smaller portfolios? Currently I have enough for Buckets #1 & #2. #1 being cash and cash equivalents(CD, Treasuries, MM, etc ). #2 is a very diversified equity portfolio.
    Perhaps change the number of years per bucket in order to have a #3?
    Any thoughts? Thx
    (Been holding off but will have to start w/d within the next year.)

    2. It really comes down to your Safe Withdrawal Rate. Assuming you’re using a 4 % SWR, your portfolio would cover 25X annual spending, and the breakdown would be as follows (assuming you want 11 years in Buckets 1 & 2):

      Bucket 1: 3 years spending, 12% Asset Allocation (3 yrs / 25 yrs)
      Bucket 2: 8 years spending, 32% Allocation (8 yrs / 25 yrs)
      Bucket 3: Remainder = 14 years spending, 56% Allocation

      1. Basically have 11 years spending in portfolio. Nothing left for Bucket #3.
        Guess I’ll be checking out early.:)

  9. Enjoyed this Fritz. Curious to your concerns regarding “if” the bond bull market is indeed over – and bond volatility increases? Second Question: (and I need to go back and read some of your prior posts, so if you have answered this – feel free to slap me!) : your in essence attempting to create a constant 11 year volatility buffer – letting the rest of the portfolio grow in risk assets -where did the 11 year figure come from? I know Pfau has done some research into increasing safe w/d rate, and you get around a 10% spending increase per year of vol buffer, but if I remember, there was diminishing returns after 6 or 7 years. Am a happy user of whole life as our volatility buffer / cash position / and replaced a sig chunk of our bonds – which allows the rest of our portfolio to remain in risk assets…. but I have never broken it down in this clear of a manner – which is incredibly elegant. Thanks for your writings!

    1. Go back and read the “Yeah, But What If….” section. 😉

      As for where the 11 years came from, that was just the level I was comfortable since:

      1) It represented close to a 60/40 mix when I retired.
      2) 11 Years just “felt” about right for a Sequence of Return buffer.

      We can always play what if scenarios, but it’s worked well for the past 8 years. Whole life as a buffer is a unique approach, makes sense if you have one in place (I’ve never run the numbers).

  10. 3 years in money market and the rest in stocks. We draw off the stocks and refill semi-annually to annually as market dictates. Life is good as God has Blessed us.

    1. That certainly would have worked well over the past decade. Make sure you’re mentally girded up for the next bear market. It’s a matter of when, no if. God has blessed us, indeed. Good problems to have, right?

  11. I always have wondered how if I have 95% of my savings is in a fidelity 401K Pre tax account under one account. How do I go about creating a bucket 2 and 3? Do I create new accounts within the fidelity account and transfer the bucket 2 and 3 monies to those? I got the allocations for the amount of money figured, just not sure how to split them up in one account so I can manage them and see what is in each account

    1. Clay, the beauty of the buckets is that you can build them within a 401k pre-tax. Bucket 1 is more problematic since it will trigger a tax bill whenever you do a withdrawal, but if that’s what you’ve got, that’s what you play with. There’s no need to have them in a separate account, just link the fund holdings in your 401k to their respective buckets in a spreadsheet to do the math.

      1. That is what I thought. didn’t know for sure if people made the separate accounts to make it easier to visually see them in the 401K but if you track within a spreadsheet that is good, Thanks for the reply

  12. I loved the explanation, well done!! I also use the bucket strategy for our retirement and have been “concerned” by the continued increase in stock exposure of bucket 3. Thanks for clearing that up for me. I will move on to enjoying my retirement activities 😊

    1. Glad to see I’m not the only one experience the Reverse Glide Path. Interesting phenomenon that I didn’t expect when I first set it up.

  13. Thank you for that description. Some questions:
    1. In the case of multiple marker down years, how low would you let the cash bucket get before refilling it up further than bucket 2 gains? How far would you refill if yes?
    2. How did you handle 2022 when both bonds and stocks were down?
    3. How well does this work with an extended down turn like a retirement starting in 1966?

    1. Some answers:

      1. I’m confident drawing it to $0 if necessary, tho the reality is I have some Alternative Assets (e.g., gold) that I could likely tap if I got that low and the stock market was still down.

      2. See #1 – I sold an Alternative Asset to fill the spending bucket. It was up for the year.

      3. Let’s hope we never find out.

  14. I think you are all getting bogged down too much with “labels.” If you are in a 60-40 portfolio (mine is 75-25) and you have a cash bucket for emergencies including a cash buffer, of, say 2+ years, they you are already in a “bucket strategy.” Asset allocation and location? Well, if it is all proportionally spread out inside of an IRA (traditional stocks & bond funds), a brokerage (after tax all stock funds) and a Roth IRA (tax free all stock fund), then what’s all the hype about? We are all in “buckets” anyway. Rob Berger’s work asks the question of how one goes about refilling the buckets (Rob wants to buy more stocks when they decline in a bear market). Fritz gives a great example on how they ARE refilled (Fritz does not sell his stocks in a down market, but he also does not add to them. Fritz’s method preserves his 11 years of spending NO MATTER what the markets do). Whether you are dabbling in “buckets” or withdrawing from a 60-40 portfolio (rebalancing along the way) and dipping into a cash reserve, we are all “Bucket Strategists.” Keep it all simple folks. Occam’s Razor?

    1. Great comment, and summary of the issue, Steve. I agree we’re probably getting too bogged down. There are more similarities than differences between the two. The biggest difference I see is the Reverse Glide Path and the rising equity % in The Bucket Strategy over time.

      We’re splitting hairs.

      1. The ability to use the high bond exposure as dry powder is a benefit of the bucket strategy that goes under the radar for many bucket strategy naysayers, including R.Berger. In fact didn’t you reduce your bond allocation after the 2020 downturn in order to buy equities on sale.

    2. IMO, they are distinctly different. 60/40 or a similar strategy tries to keep the stocks/safe assets allocation constant, whereas bucket strategy allows it to fluctuate. Allocating a fixed portion of your asset class ‘assumes’ whatever percentage you have allocated to safe assets is enough to ride out all the storm, it requires a leap of faith and letting go.. Bucket strategy is for control freaks (like me -wink wink), who want to monitor and see how many years of spending are in safe assets at the end of each year. Bucket strategy makes you feel that you are in control, hoping the number of years you pick to be in safe assets is long enough and you never have to encounter a bear market lasting more than that many years, in case of Fritz -11 years, this seems a logical approach. I like Fritz’s comment about analysis paralysis, pick a path and stick to it!

  15. Good stuff. I just wanted to say I’m a semi retired financial advisor who employs the Bucket Strategy for my clients as well as myself and it works beautifully! The one thing that I took away from this that I will use for my clients is your line of “Asset Allocation is a result of, rather than a driving factor for, the annual rebalancing process.” This is so true.

    1. Knowing my writing is influencing what a financial advisor is telling his client’s is one of the greatest compliments this blogger could receive. Thanks for the comment, Jim!

  16. Thanks for your previous answers. What happens if stocks are up for the year, but are still down from the previous year. Do you still pull from stocks are wait until stocks are back to all time high (at least as judged by end of year values)?
    And do you look at real returns (i.e. inflation adjusted) being up or down, or the unadjusted value?

    1. Chris, I’ll be the first to admit there is a level of subjectivity in a situation such as you describe. In my case, I would likely wait until it fully rebounds, depending on how many years I had left in Buckets 1 and 2. The shorter the time frame remaining, the more likely I’d be to do a partial refill. In reality, I’d scour my other holdings (including Alternative Assets, which I include in Bucket 3) to find something that was counter-cyclical and had performed the best of my holdings. And, I don’t really worry about returns, I focus on year-end value, so I guess it would be nominal vs. real.

      2. I ran some simulations using Karsten Jeske’s SWR Toolbox. Not waiting for full return works better for extended bear markets as you’re selling stocks to early by looking at just one year returns. FYI – I used real returns.
        In the worst case situations historically (like late 60s-70s), its results were about the same as a 60/40 and in some other cases, 60/40 did better. Part of the problem was as you got to the later years of retirement, the percent in equities dropped if you try to maintain 11 years in buckets 1 and 2. Yes, you got a rising equity glidepath in the early years, but that reversed in the second half of retirement.
        I imagine reducing the number of years in buckets 1 and/or 2 as you get into the second half would help that.
        FYI – I used a 30 year retirement.

  17. Have you back tested this there are new approaches like risk parity that seem to address your concerns
    Have you looked To any of those?
    You can back tested for free on portfolio charts check it out
    Curious on your thoughts.

    1. No, I think it would be difficult to back test, tho I think Big ERN made an attempt in one of his SWR series posts, if my memory serves correctly. I’m familiar with Risk Parity and think that makes sense for folks who are aligned with it, but I prefer the bucket approach. That said, I do keep some element of the Risk Parity in my diversified portfolio (e.g., precious metals) in Bucket 3.

  18. I really like the bucket strategy approach , having a clear safety buffer makes a lot of sense, especially for peace of mind during market volatility . One variation I’ve been exploring is a hybrid hold 3 years of expenses in cash as a buffer, then keep the rest in a balanced fund like VanGuard Wellington. Withdraw from cash , and refill it after market gains .
    This hybrid isn’t any riskier than the bucket strategy, you still have the same sequence of return protection, but with a simpler setup.

    1. Sergio, I had a balanced fund in my 401k (a Target Date Fund), but broke it into it’s separate components (stocks and bonds) after I retired so I could selectively sell whichever asset class I preferred. In a balanced fund, you’re required to sell BOTH stocks and bonds (based on the % of the current holdings), which doesn’t work well when trying to rebalance the specific buckets. As an example, what would you do when stocks are down, but bonds are up?

  19. Our main concerns are solo survivor taxation & inflation. As Henry Sit said in his article regarding whether you have a bigger bowl, you should be about to sleep better at night not matter what your spending strategy is used. https://thefinancebuff.com/margin-of-safety-reduces-stress-precision.html. We have about a eight figures retirement portfolio, so we are not so much focus on any strategy, but focus on our 2 main concerns by set the floor for our spending needs as one of us will be passed with 30 years TIPs ladder equal to the SS benefit of the lesser spouse, since with both of our SS benefits will be more than meet our essential spending needs. We also have cash from intermediate bond ETF if we need to use the cash flow for any unexpected spending. The rest is in value and growth ETFs that we will not touch if at all possible for legacy purposes. Thanks for your great insightful article, we enjoy your work very much.

    1. I like the concept of a long-term bond ladder to “make-up” for the reduced SS when one spouse dies. With an 8-figure retirement portfolio, I agree you don’t have much to worry about. Congrats on setting yourself up well for a financially stress-free retirement.

  20. Have been doing buckets but now that both of us are getting social security, the stock allocation is close to 70%. Do you treat both your accounts and your spouse as one account for allocation purposes? One of our IRAs is double the others. Thanks for all you do.

    1. I include all of our assets in a single bucket strategy. And yes, it makes sense that your stock allocation would be higher when SS kicks in, since you would naturally reduce the size of Buckets 1 and 2 (since you have a smaller “gap” to fill between expenses minus income).

    2. Fritz,

      Thank you for sharing this information. It was simple to follow except I was confused a bit by the “rebalancing the buckets -bear market” because stocks (bucket 3) were down to 864k the refill was “wait” (I.e. no withdrawal or refill; stays same) however, the “Adjusted” column shows 1,016k for bucket 3 instead of 864k ( which is what it should be given “wait” as the strategy) totaling also when you add all three buckets in the Adjusted balance column it equals 1,536k not 1.38 M ( though I think the total is correct) Am I missing something or is this a typo? Thanks.

      1. Great catch, Trek. Only one other reader noticed that. If you look at the next year’s starting balance, it did actually stay at 864k. The year-ending number was a typo (copied the slide and forgot to change that number).

  21. My wife and I plan to employ a hybrid approach when we retire in 1-2 years (61 and 62 at that time). Initially, we’ll go with a bucket strategy because, IMHO, it is the simplest way to address sequence of return risk. Replenish buckets 1 and 2 when equities are doing well, and hold off if they are doing poorly … done!

    As we get older, however, our plan is to move from 6-8 years in buckets one and two to only 2-3 years in those buckets. Why? Because sequence of return risk, while a potential portfolio killer in the early years of retirement, just doesn’t have the same impact on how we’ll live our lives as we transition from “go go” to “slow” go”. And, not to be morbid, but we are financing fewer years when we are in our early 70s than when we are in our early 60s.

    1. Valid thinking, Herbert. Also, as mentioned in the comment above yours, Buckets 1 and 2 will naturally be smaller once your SS kicks in, so in reality you could still keep 6-8 years of “protection,” but have a smaller $ amount and asset allocation % dedicated to cash and bonds.

      1. I totally agree with those who say a bucket approach like this versus rebalancing a 60/40 (or similar) portfolio are really just two different ways of saying the same thing. And the details of a bucket approach might be a bit more mathematical gymnastics than is totally necessary.
        But here’s the real kicker that I found in the first year of retirement, using the bucket approach… In finance (ESPECIALLY WHEN SWITCHING FROM ACCUMULATING TO DE-CCUMULATING), emotions and the ability to sleep at night or everything! When worry wants to creep in in the middle of the night, telling my reptile brain I have a 60/40 portfolio means nothing. But telling it that I have five, or 10 years of cash or equivalent, sitting there, switches off the reptile brain and sends me back to my dreams.
        I’m not saying, we should let our emotions dictate our financial decisions. But when viewing it from a perspective of designated safe money for year one, year or two,… accomplishes, the same numbers, and quiet my mind, the mathematical gymnastics are certainly worth it all.
        I’m 60 now. My plan is to change this up around age 70 and above. My primary reasons are 1) Social Security will do most of the heavy lifting, 2) sequence of return risk is minimized, 3) I no longer need my money to last 30 years, 4) potential for cognitive decline, 5) go go starts to fade into slow go, into no go.

        1. LOVE IT, Fish! In fact, I think I’m going to quote this comment in my next post (writing it now), where I do a direct comparison between the 60/40 vs. Buckets. The psychological impact is a valid consideration, and I agree the 60/40 doesn’t “feel” the same, even if we’re really just splitting hairs.

          Ironically, I also mentioned that I may consider switching to the 60/40 (more likely 65/35) in my 70’s due to the risk of cognitive decline. We’re kindred spirits.

  22. Great article ! Thanks Fritz as always – so I’m sure this falls in the “what if” section, but could one do a combination of approaches……so instead of a pure bucket or pure 60/40 strategy, could one use a bucket strategy but put a “guardrail” on how much total stock % in bucket 3 one is willing to tolerate in a upward glide path? (I suppose this may be no different than increasing the years of spend in bucket 2 perhaps)

    1. Exactly, and an example of how it can be customized. I was thinking, you could kind of accomplish the same thing by doing a 60/40, but moving it upward each year (61/39, 62/38), but no one would think of that one unless they really dug into the numbers and understood why. In essence, if you don’t do that you’ll continue to add “years” to Bucket 2, increasing beyond the 8 years initially targeted. I’m working on my next post now, comparing 60/40 to Bucket Strategy using actual returns from 2018 – 2025, I’ll include some charts that illustrate this point.

  23. Fritz – what precisely are the rules for when you would sell stocks to refill buckets 1 and 2? What if stocks are down 1%? Down 5%? If stocks drop 50% in year 1, you wouldn’t sell stocks. If then in year 2, stocks are up 15% (but still down considerably from the peak), do you sell stocks to refill? If stocks are up 3% in year 1, but inflation was 9% in year 1, do you sell stocks to refill? Do you have an elaborate set of written rules or are you just going to wing it?

    1. Mike, that’s one of folks biggest criticisms of the Bucket Strategy. In my case, I haven’t developed hard and fast rules. I’ve been fortunate in being able to search through my diversified portfolio and find holdings that appreciated, even when the overall market was down. Therefore, I’ve avoiding writing any hard and fast rules, though I wouldn’t go so far as to say it’s “winging it.” In essence, it’s look through portfolio for any holdings which could be used to refill, if required, and don’t be fixated on HAVING to refill. That’s the point of the buffer. I wasn’t sure how it would work when I started in 2018, but it’s been fairly obvious each year.

  24. Good article, thanks. What were the actual Cash and Bond returns from 2018 – 2025 ? Were they used in this article/analysis ? This information would make a complete representation of what you are trying to convey to Rob (and me and others). I like the idea of a Rising Equity Glide Path.

    1. Hold that thought, Bill. I’m actually working on my next post, using exact returns from 2018 – 2025 and comparing the 60/40 vs. the Bucket Strategy side by side. The Rising Equity Glide Path definitely occurred, as I’ll show using actual numbers in my next post.

  25. Morning,
    I’’m reading this bc of Rob 😁,
    Very interesting,
    Maybe l missed it (probably) but what about inflation? Do you increase your spending amount every year ie total amount in bucket 1 and 2?

    1. Siemen, I did address that in the article – see the important disclaimer section early in the article. For the example, I left out inflation, but explained how to account for it in the Bucket Strategy. I’m currently working on my next post, and will compare the 60/40 vs. Bucket Strategy using actual market returns and inflation rates to adjust spending. Stay tuned…

  26. I love the bucket strategy ( newly retired)
    What I need to work out is how to utilize with different accts ( taxable brokerage vs IRA’) as 70% of my portfolio is in IRA’s….and I plan to do Roth Conversions until RMD’s five yrs from now

    1. SteveB, yep, that plays into it, through I would argue it’s an equal factor for both the 60/40 and the Bucket Strategy. I may address that in a future post. Also, I am a huge fan of Roth conversions and have doing them aggressively between age 55 – 62. This year, I’m turning 63, so will sharpen my pencil to evaluate IRMAA impact when finalizing my Roth conversion strategy for the year.

  27. I have been successfuly retired since 2013. I have 3 “buckets” that coincide with my accounts, brokerage, Roth and IRA. I refill the cash in each account via 4th quarter non-reinvestment of dividends and capital gains; and use the remainder to rebalance.

    I use my brokerage account, that holds a money market fund and muni funds for gaps in my day-to-day checking account. Two of my 3 funds are not reinvested, the 3rd is new and reinvested to catch-up with the other 2.

    My Roth account is used for re-location of my IRA via conversion. My Roth bucket is used for big ticket items (pay off the mortgage, pay taxes).

    My IRA account is my old 401ks, I am slowly converting it to my Roth. My IRA bucket converts nicely, along with my bond funds. I will use my IRA bucket to move my RMD to my brokerage account.

    By keeping piles of cash I do not have to sell to meet needs, but rather to maintain my allocation. Also it has a calming effect on 500+ drops in the Dow, as buying opportunities.

    1. Solid plan for sure! Have you ever considered holding Intermediate Treasuries in lieu of cash as they are the one asset we can count on to go up during a panic. While they pay little, IT would—at least—mitigate the effects of inflation.

      Be well.

      1. Thanks Tim.

        Interesting results running my post through AI.

        I disagree with the idea “[intermedite treasuries] are the one asset we can count on to go up during a panic.” I have watched my bond funds fall with stocks in times of panic. If you have cash it is stable, it is not going anywhere, unless you take it. Although my cash did have its moment when money funds “broke the buck”.

        At 72 I have transitioned my accounts to 40% stock, 50% bonds and 10% cash (the bucket). I have short, intermediate, long term, TIPs, emerging market, and high yield bond funds. I have the Dow, Nasdaq, S+P, Value, Blended, Growth, Int’l and Reits in my stock funds. It comes from my FOMO mentality.

        Through my Roth conversions I am trying to both diminish my IRA holdings and move more monthly dividends into a Roth income stream, as opposed to just adding to my IRA and next year my 1st RMD.

  28. Retiring on 4th of July! While total return makes sense, I will sleep better having buckets. Three years in cash/T-bills, 7 years in various US Treasuries and the remainder in equities. That leaves me at 81% equities and 19% cash/Treasuries. It seemed way too aggressive until I read your post. Thanks.

    I only need a 2%-ish withdrawal to ‘make it’ 35 years into retirement. Question if would indulge me with an answer: Does someone like me who has a reasonably high net worth (7.3 million) and only requires 150k gross per year still need several years of “safe assets” or does the 2% withdrawal negate that the need for a safety net?

    Thank you so much for the thoughtful and well articulated post.

    Be well.

    1. Tim, with such a low SWR, I suspect you’ll be fine regardless of what you do. 😉 Congratulations on the high net worth, I’d challenge you to find a way to spend a bit more, while you still can. Go for a 3% SWR, and give the difference away if you’re unable to spend it. Just a thought…otherwise, you’ll likely find that $7M growing to $10M and beyond in a surprisingly short amount of time.

    2. Tim

      “… still need several years of “safe assets” or does the 2% withdrawal negate that the need for a safety net?”

      It seems to me you have known future expenses for which you will have to pay cash. I you hold that cash as your safety net /bucket, payment does not rely on unknown future market conditions.

      Enjoy your July retirement, you may spend an additional 2% on yourself without wreaking your portfolio. Also…it is fun missing the commute and taking mid morning naps.

  29. Fritz, another good article. What do you do with dividends coming out of bucket 3? Do you reinvest or do you move them over to bucket 1?

    1. In my taxable account, I used to have them auto reinvest, but stopped it after I implemented the Bucket Strategy. They’re not a small “drip refill” for Bucket 1.

      1. I figured :-). Typically if you have a decent portfolio, dividends, CG distributions and interest should cover a significant portion of your expenses helping the process. I am trying to get at least 60% of essential (not total) expenses with them. Though this is not something that is mandatory, it is a good feeling at least most of the essential expenses, are covered by organic cash flows..

  30. Hello,

    I found your blog through Rob Berger’s recommendation, and I think it is excellent. It has answered many of my questions as I get very close to retirement—so thank you, and thank you to Rob as well.

    I really like your bucket DIY approach. It fits my preference for stability and peace of mind. That said, I have a few questions I’d be very grateful if you could address:

    1) Inflation: You acknowledge that inflation is ignored in your examples. That makes sense for illustrating a year or two, but over the long term inflation clearly needs to be incorporated.
    Do you recommend funding inflation adjustments from Bucket #3 as well?

    2) Taxes: Most of my Bucket #2 bonds are municipal bonds, but at retirement about 30% of my Bucket #3 stock account represents embedded capital gains tax liability if I sell positions. Hopefully the account will continue to grow, which also means a larger future tax bill as I use it to replenish Buckets #1 and #2 and to pay for Roth IRA conversions (see below).
    Could you give some guidance on how to incorporate taxes into the bucket calculations?

    3) Roth IRA conversions: I have a large 401(k)/IRA account, and I plan to begin Roth conversions as soon as my income drops below the 22%–24% tax bracket. My plan is to “top off” conversions each year to what I consider a reasonable tax level, in order to build a long-term Bucket #3 . I also plan to pay the conversion taxes from my brokerage account (AKA Bucket #3).
    This would reduce the brokerage portion of Bucket #3, but increase a long-term Roth IRA account that serves a similar purpose. Does that framework make sense to you?
    Also, how would you suggest calculating the effect on Bucket #3 (brokerage) over time? If you have any tools, formulas, or frameworks for this, I’d really appreciate it.

    Many thanks. You became my financial Guru!

    1. Gregg, see below:

      1) Inflation: I suggest folks resize their buckets every year based on spending the prior year. When inflation increases spending, Buckets 1 and 2 must be increased. See the assumption about spending early in the post for more detail.

      2) Taxes: In retirement, it becomes impossible to avoid taxes. I use a Roth conversion strategy, also pay some capital gains, etc. I calculate my Estimated Quarterly Tax every Q1, typically using the “Safe Harbor” rule to avoid penalties. The important part is making sure you’ve captured your tax obligation in your spending estimates, and include it when you determine the size of your buckets.

      3) Roth Conversions: Your proposed methodology is exactly how I do it. It’s best to pay the tax from your taxable accounts whenever possible to maximize the about of pre-tax IRA you’re able to convert to Roth.

      Finally, as for bucket 3, I really don’t worry about it much. My focus is on Buckets 1 and 2, Bucket 3 simply absorbs whatever is left. Watch for my next post, where I’ll talk more about this.

      And…you need to find a better guru. I’m just an old retired guy trying to figure this stuff out, along with everyone else…

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