Is a Retirement Bucket Strategy Right for You and Your Money? (And, How to Calculate)

A retirement bucket strategy can be an effective way to determine your ideal asset allocation. Furthermore, a bucket strategy may give you confidence to manage your savings and investments for lifelong financial security.

However, if you think that managing retirement investments is difficult when you are working, we have some bad news: it gets much harder as you approach retirement and perhaps worse when you actually retire.

When you are younger, your primary goal for retirement investments is usually growth. However, once you start to approach retirement, you need your investments to not only grow but also fund your lifestyle, keep pace with inflation, be protected from risk, and last as long as you do.

One method for balancing the desire for growth with the need for stability is a retirement bucket strategy.

With this approach you establish different “buckets” or accounts for different types of spending.

• You invest some buckets with some risk (in stocks for example) in the hopes of more reward.
• Other buckets are put into more conservative assets (cash or bonds for example), depending on your time horizon.

Here are three common ways of setting up a retirement bucket strategy:

1. Retirement Bucket Strategy Based on Phases of Retirement

One way of setting up a retirement bucket strategy is to think about different phases of retirement.

You might establish three different accounts to meet your needs as you age.

Near Term: This bucket has funds that are sufficient to meet your spending needs and wants over the first 5 or so years of retirement. You want this money kept in cash or cash equivalents or asset types that are easily liquidated and have little or no risk.

Years 6-15+: The second bucket holds monies to be used in years 6-15ish of retirement. This bucket can be invested in things like fixed-income securities or investments with lower risk than stocks, but with some potential for growth. You can afford to take some degree of risk with this money, but not too much.

Longer Term: Your third bucket might be invested in mostly equities (funds or maybe stocks). While stocks are thought to be a riskier investment, they are probably a good way to grow money that you will not need for a long period of time. You have time to ride out any volatility that this money experiences.

You just need to be sure to update allocations as time goes by.

2. Retirement Bucket Strategy Based on Needs and Wants

You could also set up a retirement bucket strategy based on figuring out how much money you need to spend, how much you want to spend and how much would be nice to spend.

Needs: Money that you have identified as necessary for retirement would be invested conservatively. This bucket should include enough money to cover any baseline spending for all of retirement. Really think about what you need for food, shelter, healthcare, and other necessities.

Nice to Haves: Funds that could be used on nice to haves could be invested with modest risk. These are day to day expenses that you could potentially live without if you needed to.

Wants: A third account could be invested for growth. This is money that you have identified as wanting to spend – splurges, luxuries, big trips, helping grandchildren with education, etc…

NOTE: As part of NewRetirement PlannerPlus, you can create a very detailed budget and set different levels of spending for needs and wants. This can be an incredibly useful planning exercise.

3. Retirement Bucket Strategy Based on Types of Spending

Another way of approaching the retirement investment bucket strategy is to establish buckets based exactly on how the money is going to be used – this is a more detailed version of a bucket strategy based on needs and wants.

The tricky part with this strategy is that you may need buckets within buckets to insure that cash is available for short term spending while trying to grow assets in each bucket for the long term.

Nonetheless, you might want to establish the following types of buckets:

Day to Day Necessities: This is the most critical money – money you must have to fund day to day living.

Healthcare: Out of pocket spending on healthcare in retirement is shockingly high. Analysis from the Fidelity Retiree Health Care survey suggests that a 65 year old couple today will spend around $300,000 on healthcare alone in retirement.

Emergencies: The car needs repairs, the roof leaks, you get a speeding ticket – things happen and you need easily accessible money to pay for them.

Hobbies and Fun: Will you travel? Join clubs? Need supplies? This bucket is for fun and leisure.

Inheritance and Charitable Donations: You can probably keep money that you want to bequest in the future invested more aggressively.

Luxury: It is nice to have a bucket designed to spend however you want — completely guilt free indulgences. You could take more risks with these funds.

What Are the Disadvantages of a Retirement Investment Strategy Based on Buckets?

As with any investment strategy, the idea of keeping your retirement savings in various buckets has some drawbacks. Here are 3 considerations:

As discussed above, there is no one definitive way of setting up a retirement bucket strategy. And getting the right asset classes for each bucket is another layer of complexity.

The trickiest part of a bucket strategy is probably maintaining all of the various accounts and keeping the right amounts of money in each of the respective buckets.

For example:

• What happens if you use up the money in one bucket? How do you replenish?
• How much money do you need in each bucket to begin with and how do those ratios evolve over time?
• If one bucket does very well, should you reinvest your dividends in the same bucket or transfer them elsewhere?
• Should you take profits in one bucket and distribute them to other buckets?

Generally speaking, with most bucket strategies, you are spending your safest assets first. So, over time, a greater percentage of your money is being held in riskier investments.

This is counter to what many finance professionals – especially those involved in target date funds – recommend.

How Can You Calculate Your Retirement Using a Bucket Strategy?

Lucky for you, you don’t have to actually open accounts and invest all of your money to explore the idea of a bucket strategy for your retirement. There are ways to calculate potential outcomes.

Collaborate with a Financial Advisor: You could speak with a financial advisor about whether one of these strategies would be right for you.

Calculate Bucket Strategies with the NewRetirement Planner: You could also run “what if” scenarios on your own. The NewRetirement Planner enables you to explore as many of these bucket strategy scenarios as you like – in great detail.

• Start by logging in or creating an account and establishing a baseline retirement plan.
• Determine which kind of bucket strategy you want to assess.
• Use the tool determine how much money you need in different buckets and over what time periods. Here are some tips:
  • Set different spending levels on the Expenses tab for different time periods.
  • Use the PlannerPlus Budgeter to create a really detailed budget, including specifying nice to spend vs. must spend amounts.
  • Look at different kinds of spending: monthly recurring expenses, medical costs, debt payments, housing, etc..
• Then, run a scenario where you model your different buckets. Go to savings and assets and set up your buckets, each with their own rate of return. 
• Try different variations and compare.
• Review your chance of success score and take a look at your net worth at longevity to see if you come out ahead with different bucket strategies.

The NewRetirement Planner is one of the most comprehensive and powerful tools available. Forbes Magazine calls this system “a new approach to retirement planning” and it was named a best retirement calculator by the American Association of Individual Investors (AAII) and CanIRetireYet.