Using Bucket Strategy to Guard Against Sequencing Risk
Retirement planning is not just about how much you save it’s about how you spend what you’ve saved, especially during the early years. One of the biggest dangers retirees face is sequence of returns risk the chance that poor market returns early in retirement can dramatically shrink your portfolio, even if the average return is strong.
That’s where the bucket strategy comes in.
This time-tested approach helps shield your retirement from early market downturns, while keeping your long-term investments growing.
What Is the 3-Bucket Retirement Strategy?
The bucket strategy divides your retirement savings into three time-based categories or “buckets” each with a specific purpose:
Bucket 1: Cash & Short-Term Needs
- Time horizon: 0–2 years
- What’s in it: High-yield savings accounts, CDs, money market funds
- Purpose: Covers near-term expenses so you don’t have to sell investments in a downturn
Bucket 2: Income & Medium-Term Stability
- Time horizon: 2–7 years
- What’s in it: Bonds, bond funds, conservative balanced funds
- Purpose: Provides steady income and cushions volatility
Bucket 3: Growth & Long-Term Potential
- Time horizon: 7+ years
- What’s in it: Stocks, stock funds, REITs, growth ETFs
- Purpose: Keeps your portfolio growing to fight inflation and support late-life needs
Why Use the Bucket Strategy?
The core benefit is sequencing protection giving your riskier assets time to recover after market dips. Here’s how it helps:
- No panic selling: You’re not forced to sell stocks at a loss to pay bills.
- Natural rebalancing: Gains from Bucket 3 can refill Buckets 1 and 2.
- Psychological peace: Knowing your short-term needs are covered lets you stay invested long-term.
How It Protects Against Sequence of Returns Risk
Let’s use a simplified example.
Scenario:
You retire with $1 million and withdraw $40,000/year (4%).
If markets fall 20% in your first year and you’re fully invested in stocks, your portfolio drops to $800,000 and you’re pulling money out during the worst time.
But with a bucket strategy, you withdraw from Bucket 1 (cash), leaving your long-term investments alone. Over time, the market may recover and your retirement plan stays intact.
Sample Portfolio Breakdown
| Bucket | Allocation | Example Investments | Notes |
|---|---|---|---|
| Bucket 1 | 10–20% | High-yield savings, short-term CDs | 1–2 years of expenses |
| Bucket 2 | 30–40% | Intermediate-term bond funds, dividend ETFs | Generates income, stable-ish returns |
| Bucket 3 | 40–60% | Total market index fund, growth ETFs | Long-term appreciation, higher risk |
Rebalancing Buckets Over Time
- Annually review each bucket.
- Refill Bucket 1 from Bucket 2 during up years.
- During market rallies, shift profits from Bucket 3 to top off Buckets 1 & 2.
- If Bucket 3 is down, rely more on Buckets 1 & 2 until markets recover.
This approach avoids having to “sell low” in downturns.
Tools to Help Implement the Bucket Strategy
You don’t need to do it all manually. These platforms can help:
Retirement Tools & Platforms:
- Empower (Personal Capital) – Visualize buckets & withdrawal planning
- NewRetirement – Detailed modeling of retirement spending strategies
- Fidelity Planning Tools – Goal-based retirement simulations
- Morningstar Portfolio Manager – Bucket allocation and risk analysis
Is the Bucket Strategy Right for You?
This strategy works especially well if:
- You’re entering retirement soon or already retired
- You want emotional and financial stability
- You dislike seeing your portfolio swing wildly
- You prefer a clear framework for managing withdrawals
If you’re younger or decades away from retirement, a full-growth strategy may be better. But as you approach retirement, preserving wealth becomes just as important as growing it.
Final Thoughts
The 3-bucket strategy isn’t just about dividing your money it’s about protecting your peace of mind. By allocating assets according to your timeline, you reduce the risk of early loss while still pursuing long-term growth.
It also ties in well with another important retirement concept: glide paths, which gradually shift your asset allocation as retirement nears.
Up next: Glide Paths: Slowly Shifting to Fixed Income Before Retirement
