What is the Bucket Approach, and Does it Work?


In a previous post on our site, we asked: What’s your retirement number?

The genesis behind that post was sharing the best practices from our members, their own lessons learned – to pay it forward to others. Implied in that post was a Bucket Approach.

Read on…

One of the concepts in that post was to ensure “when in doubt, add financial cushion” is what we wrote.

This implies just like your asset accumulation years, like an emergency fund is a safe haven to navigate variable expenses, successful retirees also rely on cash or cash equivalents in retirement as well. That’s usually done as part of a Bucket Approach to meeting retirement income needs – although not always!

What is the Bucket Approach? Does it work? Does it even apply to you?

Read on, enjoy and comment away.

What is the Bucket Approach, and does it work?

One of the best practices we’ve learned about over the years from others is that the most successful retirees not only factor in some buffer within their annual, variable spending plans, but they also keep a healthy cash cushion just in case they need more money than they thought – after they thought they thought of everything!

In fact, not only can these retirees live on less, in any given year, they could also tap 1-year and in some cases 2-years of cash or cash equivalent reserves without selling any equity portion of their portfolio.


The Bucket Approach is anchored around that – assets needed to fund near-term living expenses ought to remain in cash or related assets such that regardless of what the stock market does in the near-term, living expenses are fulfilled.

On the other end of the spectrum, assets that won’t be needed for several years or more can remain in a diversified pool of long-term equity holdings since the cash buffer provides the peace of mind to ride out periodic downturns in the long-term portfolio.

What are the buckets in the Bucket Approach?

We believe the cornerstone of this approach is what we just wrote about: cash or cash equivalents are the highly liquid, accessible component to fund near-term living expenses for one year or more.

You determine how much you might need in Bucket 1 by forecasting your spending needs on an annual basis; less any certain income you will get such as those from your workplace pension or government benefits. The difference is the amount needed for Bucket 1.

Two Buckets and Beyond

We align to the Morningstar models in that retirees may have two or more buckets beyond their cash position. For the purposes of this article, we’ll include three buckets to see if that might apply to you.

Beyond Bucket 1, Bucket 2 is usually multiple years of living expenses with a focus on income production.

Bucket 3, the final bucket, is normally dominated by stocks or growth-oriented assets that focus on price appreciation since this bucket is designed to deliver the best long-term performance.

Therefore, a three-bucket approach splits up your investments; in timeframes you can define.

Some examples will follow.

Bucket 1 – short-term spending needs (e.g., up to 1-year of spending or more).

Bucket 2 – intermediate-term spending expectations (e.g., Years-2 to -4 or more).

Bucket 3 – longer-term spending forecasts (e.g., Years-5 and beyond).

Bucket 1: Short-Term Bucket

The short-term bucket is almost always focused on low-risk assets (cash or cash equivalents). Any combination of cash savings, higher interest savings accounts, money market accounts, or short-term treasury bills could work.

The idea behind this bucket is all income needs are readily available and can be safeguarded from most if not all stock market volatility. Pretty much everyone we know, who has been successfully planning for retirement or is now in retirement, keeps some cash or cash equivalents on hand.

Bucket 2: Intermediate-Term Bucket

The intermediate bucket, or medium-term bucket however you want to frame it, is designed to cover expenses beyond Bucket 1. Money/assets in the intermediate bucket should (likely) be invested in conservative to moderate risk investments to help fight inflation since Bucket 1 (cash) will struggle with that. Any combination of longer-term bonds, GICs, preferred shares, dividend paying stocks that have long established histories for rewarding shareholders, REITs and other assets could be in this bucket.

Bucket 3: Long-Term Bucket

In this final bucket, you can consider maintaining higher-risk assets in your portfolio for growth. Any assets in this bucket are not likely to be tapped for at least five years, and potentially even longer, to provide an ample runway for growth. Growth stocks, small cap stocks, emerging market stocks, NASDAQ ETFs or any 100% all-equity indexed fund is likely suitable here. Growth from the long-term bucket is important since periodic trimming is required to refill other buckets.

We believe it’s important to note there are no hard and fast rules when it comes to the Bucket Approach. How much needs to go into each bucket will be personal. Here are diverse ideas for two-different investor styles:

Bucket 11-year in cash or cash equivalents to spend2-years’ worth in cash + interest savings accounts + money market funds to spend
Bucket 2Dividend stocks and REITs that pay income to replenish Bucket 1Year-3 to Year-5 of spending in GICs that pay interest to replenish Bucket 1
Bucket 3NASDAQ ETF QQQ for growth; sell ETF units periodicallyLow-cost 100% equity ETF for growth (VEQT, XEQT, XAW, VT, others); sell ETF units periodically
Who is this for?·       Income-oriented investors who already gain meaningful income from their portfolio via dividend stocks.

·       Investors that have a workplace pension.

·       Older retirees who are already receiving CPP and/or OAS income streams.

·       Investors that do not have multiple income streams who must rely on their portfolio for safety and growth.

·       Investors that want to rely on keeping their capital intact to longevity risks.

Benefits of the Bucket Approach

A few reasons come to mind:

  1. It protects you against stock market volatility. Short-term income needs are met with cash or related safe investments – no need to sell stocks down in price to manage cashflow needs.
  2. It leaves you ample room for growth, which is essential to fight wealth-killers like higher inflation or higher taxation.
  3. It organizes your portfolio in a rational way avoiding rules of thumb that are not tailored to you (i.e., you must have % bonds in your portfolio to match your age.)

Drawbacks of the Bucket Approach

  1. It may not be needed. Some investors might have multiple, ample, secure income streams whereby the sums of pensions, government benefits and/or dividend income is consistently than expenses. The retirement bucket strategy might require more work than necessary. 😊
  2. You must have sufficient assets to start with, to organize your portfolio in a way that differentiates short-term vs. intermediate-term vs. long-term investments. Meaning, there is no need to reorganize your portfolio if you don’t have meaningful personal assets to do so.
  3. You must rebalance your buckets.

The Bucket Approach in Practice

For this post, let’s assume a couple has a $1 million personal portfolio that they plan to enter retirement with, and drawdown over the coming decades beyond spending government benefits.

Let’s also assume they have a modest tolerance for investing risk but not too much – so they desire something like a 60/40 stock/bond portfolio give or take.

They’ve determined their bucket approach to be:

 ApproachAmount / Sample
Bucket 11-year in cash or cash equivalents to spend; or slightly more.$72,000
Bucket 2Years 2-4 in GICs.$216,000
Bucket 3Low-cost 100% equity ETF like VGRO; sell units periodically.$712,000

Some portfolio rebalancing might be required to keep bucket values in line with risk tolerance, spending needs, and timeframes.

If in 2024, the stock market did very well, and VGRO went up 10%, at the end of this year bucket 3 would be higher than the $712k initial value and you could sell some VGRO ETF units for bucket 2 for safe keeping. Spending is easy when things continue to go up, however, this approach is purposely designed to counter stock market volatility.

If the stock market goes down by 10%, instead of spending any VGRO ETF units you could consider moving some funds back from bucket 2 to bucket 3 to buy some VGRO units when they are cheaper in price OR simply spend from Buckets 1 and 2 for the near-term and leave bucket 3 alone for a stock market recovery in the coming years without moving anything at all.

The Bucket Approach gives you some flexibility to adjust to market conditions, inflationary conditions, tax regime changes (i.e., new capital gains proposals!) so that you remain flexible with your spending patterns over time.

Check out the visual:

What is the Bucket Approach

Source with attribution to: Charles Schwab. https://www.schwab.com/learn/story/phasing-retirement-with-bucket-drawdown-strategy

While a U.S. reference, we like this visual above since it highlights how one might consider deconstructing their portfolio, a bit, to accommodate the Bucket Approach for retirement income planning.

Does the Bucket Approach work?

Yes, we’ve seen it in practice several times but typically, a two-bucket system is used:

Bucket 1 – short-term spending needs (cash, GICs, other near-term assets are pooled together), leaving

Bucket 2 – long-term equities or a balanced portfolio matched to the investors’ tolerance for stock market risk.

What is the Bucket Approach Summary, what are we doing?

As we continue in our semi-retirement years (for Joe), or near them as Mark as his My Own Advisor is, we have or are actively building upon our own respective bucket approaches:

  • Joe continues to keep a healthy cash position of 1-year or more as part of Bucket 1, withdrawing dividends from his corporation, along with leaving his diverse basket of stocks and ETFs alone for growth, and
  • Mark is building his 1-year cash cushion this year, maintaining his mix of dividend paying stocks and low-cost ETFs (like XAW, QQQ) as a hybrid investor.

We are doing this knowing that sequence of returns risks is very real: if a major stock market drop occurs and markets stay down for a year or so, we know our portfolios might struggle and our desired portfolio withdrawals could be impacted if we remained 100% equities all the time.

While we don’t anticipate another huge financial crisis, something like it could happen again – we just don’t know when. Our research findings have informed us that you should expect the following:

How long do stock market corrections last

Source: https://www.myownadvisor.ca/how-long-do-stock-market-corrections-last/

So, almost expected beyond volatility of +/- 5% stock market declines every few months that some corrections could be at least 20% and remain “down” for about 1.5 years.

Smart retirees incorporate this thinking into their financial projections and planning, as they should, and we are doing the same.

By keeping some cash and cash equivalents in our portfolios, along with some dividend paying equities, we remain confident that the stock market could suffer for a few years and our respective portfolios would remain resilient. We’ll keep you posted if we change our approach and we’ll highlight other best practices from our members over time too!

Need any help with understanding your cashflow or retirement income needs?

Developing and managing a well-diversified, investment portfolio, if executed well, is very likely to meet your retirement planning and your retirement income needs. Win-Win.

We know since we’ve seen SO much evidence over the years that DIY investors can do this and do this very, very well.

With our free newsletter, we’re committed to sharing new and updated content every month that supports DIY investors at any age with cashflow concepts, determining the best products or investments to consider when it comes to building wealth and growing your cashflow, and sharing ideas about how to manage and navigate that cashflow and your portfolio in retirement.

This post is just one example.

We also enjoy helping others with their retirement income readiness…but in a low-cost way…

As passionate DIY investors including owning the stocks and ETFs above, we know others invest the same way and moreso, they are tired of the high-fees charged by some professionals for some services – we believe there is a better way.

With our low-cost serviceswe offer a couple of high-value, low-cost financial projections solutions to help meet the needs of any DIY investor. We’ve offer these solutions to Canadians because we believe saving, investing, portfolio building and monitoring should be a process – one that needs a bit of maintaince and ongoing support – but any reporting support shouldn’t cost you thousands of dollars.

As founders, owners and content managers of this site, we simply offer up our time, expertise, services and solutions to other like-minded DIY investors – without any strings attached. We believe, full-stop, the cost for any retirement readiness solutions shouldn’t be for the wealthy so the pricing needs to reflect that. We also offer a money-back guarantee for all our solutions, services and time – try finding that somewhere else. 🙂

We enjoy helping DIY investors in two (2) low-cost service models to support their decisions!

  • Done-For-You – we do the work, analysis, and data entry, and provide your reports OR
  • DIY – whereby you do all the work, you do your own data entries, and you get your own results in some professional financial planning software – we essentially open up this solution for you to use 24/7 to be your own retirement income planner!

If you need some help solving your retirement decumulation puzzle (i.e., how to efficiently withdraw from your retirement accounts), or figuring out if you have enough saved from any portfolio you’ve constructed we’re here to help answer those questions and more!

If you are interested in obtaining private projections for your financial scenario or want to learn about about our DIY solution, please contact us here to get started.

We look forward to sharing more free content over time. We look forward to your comments on this post or any other investing subject – just write or comment!

Mark and Joe.

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2 thoughts on “What is the Bucket Approach, and Does it Work?”

  1. Thanks for another interesting post. I always struggle to differentiate between the bucket approach and simply drawing down a standard balanced portfolio. The bucket approach highlights the importance of diversifying the “bond” portion of a typical balanced portfolio to include cash and GICs rather than just bonds, but apart from that, it appears to be the same process. You draw down the assets that are up, leave the ones that are down, rebalance the rest and repeat. When stocks are down, you’ll be drawing on the bond / cash portion of the portfolio and when stocks recover you’ll be drawing from the stock portion. The rebalancing replenishes the allocations and you’re ready for the next round. Am I missing something? Thanks.

    • Thanks very much, Martin.

      Yes, we believe any Bucket Approach (however it is designed) is really a buffer against poor stock market returns since we don’t know how much nor how long some portfolios might be down in capital at some point. The flipside of this equation is of course some portfolios don’t need any buckets at all – since other sources of retirement income might be very secure (e.g., pensions, government benefits, annuities, etc.). It really depends but we thought we’d highlight this approach for a few considerations!

      There is nothing wrong with selling bonds when high or equities when high and rebalancing the portfolio that way to your point. All good. You are not missing anything and everyone needs to consider how they might obtain meaningful income from their portfolio…there are lots of ways to achieve that in our book and this approach is just one tool in a drawdown toolbox.

      Thoughts back?

      We appreciate the comment!


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