Reviewing the “Buckets Investing Strategy”

There are many ways to manage your money during retirement. Only a few of them work. One that I’ve recommended for some time and that seems to work for some of my readers is known as “the buckets strartegy.” You can read about it in some detail here, but here’s a summary.

You divide your retirement portfolio into several different portfolios or buckets. The first bucket contains enough money to meet your spending needs (after those funded by Social Security and any pension) for two to five years. Five years is the best and most conservative, becaue that’s generally a full stock market cycle. This portfolio is invested for maximum safety. You aren’t trying to live off the income. You will withdraw both income and principal as money is needed. This bucket is invested in money market funds, certificates of deposit, and similar investments. Other buckets are for long-term periods, and are invested appropriately. Some people recommend only two buckets: short-term spending needs and the long term. Others recommend several buckets of varying duration, with the longer-term buckets having more aggressive portfolios.

Some people say this doesn’t result in a different investment strategy overall than a single diversified portfolio. That might be true. The real purpose of the buckets strategy is to provide a mental and emotional structure that overcomes the urge to sell long-term investments when they’re having a tough time. They know there’s enough safe cash to pay the next few year spending, and that’s plenty of time for the long-term investment to recover. Consider the buckets strategy if you aren’t happy with other approaches.