What Is The “Bucket” Approach To Retirement Income Planning?

How long do you think your retirement savings will last you? 

Your investment portfolio that you are putting together for when you plan to retire is more critical than ever.

It will need to be able to keep up with inflation. While also being able to grow in order to finance your lifestyle. And protect you from risk.

It can be tricky to balance all these competing requirements. Which is why you need the right strategy such as the retirement bucket strategy.

The idea behind the bucket strategy is to divide your retirement portfolio into several buckets. With carefully structured transfers between these. 

The first bucket may contain enough liquid assets as well as cash to finance several years of retirement. While the other buckets may contain higher risk assets. 

You would only replenish the first bucket after the higher risk items perform well. 

Retirement Bucket Strategy (1) (1)


According to the mental development experts at Mindset Mastery, having a strategy like this is a good intuitive approach. “Knowing what your goals are in retirement is the first step in conceiving a plan to help you get there, which is why practicing mindfulness at this stage is important. Something like the bucket strategy is quite customisable and helps insulate retirees from concerns over a bear market in their retirement.”

A retirement bucket strategy is one way to balance the need for growth with the need for stability. This strategy utilises your different “buckets” for different types of spending. You can then invest some buckets with a higher level of risk in the hope of getting a higher reward, such as investing in stocks. 

Depending on your time horizon, you can invest other buckets conservatively, such as in bonds or cash for example.

Here are 3 common ways to set up a retirement bucket strategy:

1. Retirement Phases-Based Bucket Strategy

Thinking about the different retirement phases is one way to set up a retirement bucket strategy. 

You might establish 3 separate accounts to meet your needs as you age.

  • Near Term: This is a bucket with funds sufficient enough to meet your spending wants and needs over the first 5 years of your retirement. The money should ideally be kept in either cash or cash equivalents with little to no risk since you will be needing the money now or in the not so distant future. It isn’t money that you should be putting at risk. 
  • Years 6 to 15+: It is a bucket that holds money that you will use between years 6 and 15, thereabouts of retirement. It should be ideally invested in things that have a lower risk compared to stocks but have some potential for growth or even fixed-income securities. You may afford to take some level of risk with the funds, but not to a great extent.
  • Longer Term: It is the third and final bucket that should ideally be invested mostly in equities. Stocks might be considered a riskier investment. But they are actually an excellent way to grow money that won’t be needed for a long period of time. You will have enough time to ride out any volatility experienced by the money.
Happy couple in retirement (1)

2. Wants- and Needs-Based  Bucket Strategy

It may also be an excellent idea to set up a retirement strategy that’s based on determining the amount of money you need to spend. 

This is evaluating the amount that you actually want to spend and the amount that would be nice to spend.

  • Needs: You would invest money that has been identified as necessary for investment conservatively. The funds should include any baseline spending for all retirement. Give serious thought to what you need for shelter, food, healthcare, as well as other necessities.
  • Great to haves: You would invest funds that you plan to use on great to haves on investments with modest risk. These are basically the everyday expenses that you can potentially do without if it ever comes to that.
  • Wants: You could invest the third account for growth. The funds in this bucket are those that you have identified as wishing to spend on various things such as big trips, luxuries, splurges, helping your grandchildren with their education, etc.

You can come up with a very detailed budget. Then set different levels of spending for wants and needs, which can be a very useful planning exercise.

Retirement Funds Graphic

3. Spending Type-Based Bucket Strategy

Establishing buckets on the basis of how you plan to use the money is yet another way to approach this strategy. 

It is actually a more detailed version of the wants and needs-based bucket strategy.

The tricky part with this specific strategy is that buckets within buckets may be needed to make sure that cash is available to meet your short-term expenditure while attempting to grow assets in each of the buckets for the long term.

Still, you may want to establish the following types of buckets:

  • Everyday Necessities: It is the most critical money that you must have to fund your everyday living expenses. Cost of retirement expenses vary location to location.
  • Healthcare: Out of pocket healthcare expenditure is surprisingly high. According to health specialists this is a costly necessity. They explain, “a couple who is 65 and over are estimated to be spending about $280,000 on healthcare alone in their retirement. We all have health concerns as we age, allocating for this as we start to seriously plan for retirement becomes a sensible decision for everyone.”
  • Emergencies: The roof leaks, the car needs repairs, you get a speeding ticket – things happen and you require easily accessible funds to pay for such.
  • Fun and Hobbies: Will you travel? Require supplies? Join clubs? This bucket is specifically for leisure and fun.
  • Charitable Donations and Inheritance: You can probably keep money that you would like to bequest in the future invested more aggressively.
  • Luxury: It is great to have a bucket where you can spend as you please – indulgences that are totally guilt-free. You can afford to take more risks with the funds in this bucket.

Wondering which bucket strategy to choose? Talk to a Wealth Path team member today!


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