Key takeaways

  • A retirement bucket strategy divides assets into separate accounts for immediate cash flow needs, short-term savings and long-term planning.

  • This type of income strategy may help mitigate market risks and the stress of relying on accumulated wealth for retirement.

  • Diversifying and prioritizing different income streams and investments can help stabilize your cash flow while protecting money in accounts earmarked for future goals.

After decades of working and accumulating wealth, it can feel strange to have to rely on that money to fund your retirement. According to a 2023 Gallup poll, 66% of Americans worry about not having enough money for retirement—the biggest financial stressor.

That’s why a smart cash flow strategy for your post-working years is key. A popular option is the retirement bucket strategy, a withdrawal method that prioritizes spending based on where you are in retirement. One of the benefits of this kind of strategy is that it can help mitigate the risks of market downturns.


What is the retirement bucket strategy?

The retirement bucket strategy involves dividing your assets into separate buckets that will fund your lifestyle at different points in retirement. How these buckets are defined vary from person to person but will generally encompass three asset accounts:

  • Immediate needs
  • Short-term savings goals
  • Long-term planning

With the retirement bucket strategy, you can better weather market downturns since your money is spread across multiple investment accounts with varying degrees of risk and liquidity.

Having a framework for understanding and prioritizing spending in retirement can help mitigate some of the psychological stress that you may feel once you leave the workforce and a regular paycheck behind.


How to use the retirement bucket strategy

The number of buckets, what they’re called and the period each covers can be tailored to fit your needs, but some of the most common segments include:

  • Immediate needs: Essential living expenses like groceries, utilities and mortgage payments fall into this category. A good rule of thumb is to maintain sufficient funds in cash reserves or cash alternatives from predictable retirement resources—think Social Security, pension payments and required minimum distributions (RMDs)—to cover, ideally, 100% of essential expenses for the next one to two years. This ensures you won’t need to liquidate assets, potentially those that are subject to market fluctuations.
  • Short-term savings goals: Roughly covering years three through 10 of retirement, the second bucket may include money to fund nonessential or unforeseen expenses, such as a new car, a dream vacation, your grandchild’s college tuition or an unexpected health event. Certificates of deposit (CDs), money market accounts and short-term fixed-income investments, for example, allow the money in this bucket to grow to keep pace with inflation but are relatively low-risk.
  • Long-term planning: Beyond year 10 of retirement, you may be thinking about your long-term goals, such as leaving a legacy for loved ones or paying for long-term care. Since you won’t need to access these funds right away, the money in this bucket should be invested to generate potential growth.


Sources of retirement income

An effective plan for cash flow in retirement uses and prioritizes multiple income streams and investments. This portfolio diversification enables you to meet near-term income needs, maintain adequate cash reserves for emergencies and resist early withdrawals from retirement accounts.

Here’s the order in which you might want to implement these income streams to fund retirement:

  • Retirement resources: The foundation of your retirement income plan, these predictable sources of income include Social Security, pensions, annuities and RMDs from employer-sponsored retirement plans like 401(k)s.
  • Earnings and income: These include dividends from stocks, interest from bonds and capital gains distributions from mutual funds, as well as income from part-time work, a business or rental properties.
  • Asset and investment drawdown: Investment withdrawals, distributions from cash-value life insurance policies, annuities and real estate earnings help bridge income gaps.
  • Legacy assets: In addition to addressing your short- and long-term needs, consider including the legacy you’d like to leave for your loved ones or charities as part of your strategy. Making gifts during your lifetime or upon death can affect your retirement strategy, including tax implications. A financial professional can help you leave a legacy in a way that maximizes the benefit to both you and future generations.


Planning for a secure retirement

Throughout your career, you’ve worked hard to save and accumulate a retirement nest egg. To make a lifetime of saving work for you in retirement, it’s important to put a plan in place to generate income that will allow you to live the lifestyle you want, while also safeguarding against the unpredictability of the market, changing tax laws and longer life expectancies. Implementing a retirement bucket strategy is one way to do just that.

Learn how we can help you plan for your retirement.

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