How to Structure Retirement Savings for Stress-Free Cash Flow

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A well-designed retirement plan shouldn't focus on chasing returns or trying to time the market. Instead, it should organize your money according to its purpose.

A three-bucket approach is an effective way for people nearing or in retirement to align assets with risk tolerance and cash-flow needs. By separating funds into three buckets:

A safety bucket
An income bucket
A growth bucket

This strategy can help reduce stress and limit costly financial mistakes.

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The safety bucket

The primary purpose of the safety bucket is stability and liquidity. It's designed to cover immediate and short-term expenses while also protecting against uncertainty.

This bucket typically includes an emergency fund for unexpected costs, such as major home, car or appliance repairs, or an unforeseen loss of income.

Economists generally recommend that employed individuals maintain three to six months of income in emergency savings, while retirees might need six to 24 months.

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A key benefit of the safety bucket is that it allows you to meet expenses without being forced to sell investments when markets are down.

The safety bucket is commonly funded with checking and savings accounts, certificates of deposit (CDs), money market accounts and Treasury Bills. While these assets don't offer substantial growth, they're available when you need them.

That said, it's important not to allocate too much of your portfolio to the safety bucket. Interest rate environments change, and yields on savings accounts, money markets and CDs can decline when rates fall.

Periodically reviewing available options can help ensure this bucket remains efficient.

Large safety buckets can also be problematic during periods of high inflation, as inflation erodes the purchasing power of cash over time.

In 2022, for example, investors who held most of their assets in cash saw a meaningful loss in real value because yields failed to keep pace with inflation.

The income bucket

The income bucket is designed to provide reliable cash flow during retirement. Social Security and pensions are the most common examples, though pensions are far less prevalent today than they were 30 or 40 years ago.

The goal of this bucket is to supplement guaranteed income sources and help fund ongoing retirement expenses. It also serves as a buffer between conservative assets and growth-oriented investments. Once you stop working, your paycheck must come from somewhere.

Funding sources for the income bucket might include annuity payments, bond ladders, dividend-paying stocks, balanced mutual funds, real estate or systematic withdrawals from designated accounts.

This bucket typically experiences less volatility than the growth bucket and might offer modest growth over time. However, some income strategies come with liquidity constraints.

For example, annuities often include surrender periods, and bond ladders involve staggered maturity dates. When allocating funds to this bucket, it's important to understand the time commitment and potential limitations on access.

For many retirees, Social Security and pensions alone aren't enough to support their desired lifestyle. That makes the income bucket essential.

Relying solely on the safety bucket sacrifices long-term purchasing power, while relying entirely on the growth bucket exposes retirees to market timing risk.

Taking distributions during market downturns can create sequence of returns risk, which can significantly reduce portfolio longevity.

The growth bucket

The growth bucket focuses on long-term growth potential and inflation protection. It's intended to fund expenses later in retirement and help ensure that savings last throughout a potentially long retirement.

Assets in this bucket typically include a diversified mix of equities, growth-oriented stocks and exchange-traded funds (ETFs). Growth bucket investments generally offer higher long-term return potential, are usually liquid and are subject to market volatility, with no protection of principal.

While it's common to reduce overall risk as retirement approaches, maintaining an appropriate allocation to the growth bucket remains important. Without sufficient growth exposure, inflation can significantly erode purchasing power over time — especially for retirees with long life expectancies.

Risk calibration is critical. Understanding downside risk is just as important as projecting potential returns. One practical guideline is to periodically rebalance by replenishing the safety and income buckets when market conditions are favorable and you feel comfortable trimming growth assets.

The growth bucket can also support legacy planning or charitable goals.

Bring the buckets together

The three-bucket retirement planning strategy provides a clear framework for managing risk, ensuring liquidity and balancing growth across different time horizons.

By organizing savings based on when funds will be needed, this approach helps mitigate both longevity risk and market volatility.

Equally important, the structure makes it easier to understand how and why your money is invested.

That clarity can reduce emotional decision-making during market swings, provide confidence that essential expenses are covered and allow for growth-oriented investing to combat inflation and sustain wealth over decades.

Dan Dunkin contributed to this article.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

Networth Advisors LLC is an SEC registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Ayden Hanes is an investment adviser representative and insurance professional who joined Networth Advisors LLC in 2023 after working in the banking industry with JPMorganChase. He holds a FINRA Series 65 license, as well as Pennsylvania life, accident and health insurance licenses. A graduate of Penn State, Hanes earned his MBA from PennWest Clarion.