The Retirement Bucket Rule: Your Guide to Fear-Free Spending

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We spend decades planning for our retirement, diligently socking away money year after year. We know early on, the more we save, the better off we’ll be when we trade the paycheck for leisurely pursuits or our next chapter.

After all, study after study tells us how much we need to save, how to save, and the ideal asset allocation to achieve our retirement goals. And there are endless financial products from target-date funds to 401(k)s designed to help us save for our golden years.

But what about when we reach retirement and have to start drawing down our retirement savings? Where are all the studies telling us point-by-point what to do?

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Sure, financial advisers can help, but where is the voluminous information once we’re in retirement?

The comparative lack of advice can lead to fear. Either we’re afraid we’ll outlive our savings and we end up spending too little, or we go a little crazy and spend too much.

Left unchecked, both can be negative, which is where the bucket approach to retirement spending comes in. With this strategy, you put your spending in three buckets. It helps you remain disciplined and worry less because you know where your money is and how much you have to spend.

“For people who need their assets to generate income and have to take withdrawals, the bucketed approach works very well,” says Aaron Cirksena, founder & CEO of MDRN Capital. “It helps them not react with emotion. If the money is bucketed out, it's easier to weather the storms if the markets go down.”

History has proven that the people who don’t react when markets are tanking tend to recoup their losses and then some. This proved to be true during the Great Recession, during COVID and the sell-off in 2022.

When it comes to using the bucket approach for your retirement spending, think about having three buckets: one is for your short-term needs, one is for medium-term needs, and one is for long-term needs. Here’s a breakdown of how it works.

The short-term bucket — one to two years of spending

The first bucket of spending is your short-term needs, the money that you’ll spend in the first one to two years of retirement. It is used to supplement the monthly income you receive from a pension, Social Security, real estate, or any other recurring income.

Let’s say you need $60,000 to cover all your expenses, and $30,000 will come from fixed income. The remaining $30,000 will come out of your retirement savings and will be housed in something safe and easily liquid, such as a high-interest savings, checking, or money market account, says Tyler End, CFP and CEO/Co-Founder of Retirable. This bucket is used to cover your immediate needs.

By having this money set aside, it will prevent you from selling off assets, potentially at a time when the markets are down or when it may not be tax advantageous for you.

Remember, you want to avoid the sequence of returns risk, which occurs when you experience negative investment returns early in retirement and are forced to take withdrawals. That can significantly impact the lifespan of your retirement savings as it leaves less money to recover when the markets rebound.

The medium bucket — two to ten years of spending

This bucket of retirement spending is designed to provide a stable stream of income that can keep up with inflation. This bucket shouldn’t include risky investments and should offer principal protection, says Cirksena, who points to bonds and fixed indexed annuities as areas you may want to place your assets.

It's a good idea to check with a financial adviser before choosing where your medium-term assets are invested. This bucket is used to replenish the short-term bucket and can also go towards any unexpected expenses. It gives you flexibility if your spending increases and peace of mind knowing a portion of your retirement savings is always protected.

The long-term bucket — eleven years and beyond

This is where your growth assets will stay. This money will be invested more aggressively in the stock market, with a ratio of approximately 70% stocks and 30% bonds.

“It frees people to be more aggressive. You don’t care about the year-to-year fluctuations or if the market is down 20% because you have another 15 years before you tap that bucket,” says Cirksena. “You can let that bucket grow and compound over a long period of time.”

Once you have exhausted your short and medium buckets, you can use your long-term bucket to start the strategy all over again.

“It's an evergreen type of strategy as long as you are setting it up to avoid ever selling at a loss,” says Cirksena. “You’ll never have to worry about the stock market giving good performance or not.”

Bucket strategy DIY? Maybe

The bucket strategy of spending in retirement works whether you have $100,000 in savings or $5 million. While financial advisers say you can create one on your own, it does require investment know-how and savvy.

A better approach is to seek the help of a financial adviser who can map out where your money should go in the short-, medium- and long-term.

After all, for this strategy to work, your money needs to last and grow across all the buckets.

“It's structured to get the right risk-adjusted portfolios,” says End. “The secondary benefit is that it creates discipline around spending, and it's still flexible. If your water heater breaks, you can still pull money, or if the stock market drops 10% you know you can wait for the market to recover.”

Donna Fuscaldo is the retirement writer at Kiplinger.com. A writer and editor focused on retirement savings, planning, travel and lifestyle, Donna brings over two decades of experience working with publications including AARP, The Wall Street Journal, Forbes, Investopedia and HerMoney.