In January, I was honored to speak about The Bucket Strategy at a CampFI event in Florida. Today, I’ll be sharing a portion of my presentation on “How To Refill Your Buckets in Retirement,” based on my experience through 8 years of retirement.
As proof, here’s a photo of me presenting one of the slides you’ll read about in today’s article:
“Professor Fritz” teaching The Bucket Strategy at CampFI
This is the 5th article in The Bucket Strategy Series. Links to all of the posts are below:
Programming Note: I will also be writing an article on “The Strategic Advantages of The Bucket Strategy” as my next post. As I’ve worked with the strategy, I’ve come to appreciate some important strategic advantages that I’ve never seen published (For example, it results in a Reverse Glide path, which I’ll touch on today). Look for that article next month.
Also, I should clarify that I’m not trying to “sell” The Bucket Strategy. It’s one of many ways to create a “retirement paycheck,” and it’s worked well for me. The important thing to consider is which elements of this strategy resonate with you. Consider how those elements fit into the strategy of your choosing. The important thing is to have a plan that works for you. I hope this series is helpful as you consider what system you’ll design for your retirement.
Today, we’re taking a look at How To Refill Your Buckets, based on my 8 years of experience using The Bucket Strategy. Share on X
I’ve been using The Bucket Strategy since I retired in 2018, and it’s worked well for me. It takes me less than an hour per year to manage it, and I expect to continue using it for years to come. One of the “hacks” I’ve found is to link each line in my Net Worth Statement to its corresponding “Bucket” in a separate tab in my spreadsheet. When I update my Net Worth, I get an instant update on the status of each of my buckets.
Some have argued that the Bucket Strategy is too complicated to manage, but I’ve found the opposite to be true. Having links to my net worth makes it easy to compare my year-end balances to targets for each bucket, make the appropriate spending revisions, and rebalance, as I’ll present below.
Before we proceed, it’s important to note:
Bucket 1 and Bucket 2 are time-based (Years of Spending)
Asset Allocation is a result of, rather than a driving factor for, the annual rebalancing process.
Read those two bullet points again; they are extremely important.
How To Refill Your Buckets
Below, I’ll provide a series of slides from my CampFI presentation that illustrate how the refilling process varies based on the previous year’s market results.
First, an important assumption regarding annual spending:
For simplicity, spending is assumed to be “flat” in the scenarios below. To account for inflation, you can (and should) increase spending assumptions annually. I use a Safe Withdrawal Rate calculation to ensure the spending increase is within my guidelines. Check out A Step-By-Step Guide For Your Annual Financial Update for details. Once I know I can afford the increase, I adjust the buckets accordingly.
When you increase spending, you must increase the $ amount targets for Buckets 1 and 2, since both are intended to cover 3- and 8-year’s spending, respectively. For example, Bucket 1 should be adjusted as follows:
Original Target: $150k (3 Years of spending @ $50k)
Revised Target: $180k (3 Years of spending @60k)
With that assumption understood, let’s get started with the illustrative overview of the refilling process:
Starting Position At Retirement
At the start of retirement, a common Bucket Strategy setup for a $1.5M portfolio is shown above. With $50k of annual spending, the retiree has established an opening position with 3 years of cash in Bucket 1 ($150k), 8 years in Bucket 2 ($400k), and the remainder in Bucket 3. Take note of the Asset Allocation, we’ll be discussing how that evolves. For simplification, we’ll assume Bucket 1 is Cash, Bucket 2 is Bonds, and Bucket 3 is Stocks:
Asset Allocation – Opening Position:
Cash 10%
Bonds 27%
Stocks 63%
End of Year 1 – “Typical Year” (Before Rebalancing)
Year 1 represents a “Normal” year in the market, with returns of 10% for stocks, and 3-4% for cash/bonds.
At the end of the year, you can see $50k of spending has been withdrawn from Bucket 1. After factoring in market returns, Bucket 1 is below the 3-year spending target by $46k ($104k actual vs. $150k target), and Bucket 2 exceeds the $400k (8-year spending) target by $16k. Bucket 3 has grown from $950 k to $1.05 M with a stock market return of 10%. It’s important to note that the entire portfolio has grown by $60k, from $1.5M to $1.56M.
Year 1: Rebalancing Strategy
We need $46k to refill Bucket 1 cash back to its 3-year spending target of $150k. (Note that we use “Years of Spending” as our metric for rebalancing Buckets 1 and 2, NOT an Asset Allocation target). This “Time Segmented” approach to rebalancing is a critical element of The Bucket Strategy.
To refill Bucket 1’s $46k shortfall, we…
Move $16k from Bonds to Cash (Bucket 2 to Bucket 1)
Move $30k from Stocks to Cash (Bucket 3 to Bucket 1)
After rebalancing, we’re back at our target with 3 years of cash in Bucket 1, 8 years of bonds in Bucket 2, and the remainder of stocks in Bucket 3. Note that our Asset Allocation is a result of, and not a driver for, our rebalancing decisions. Using the “Years of Spending” target to rebalance Buckets 1 and 2 results in the following Asset Allocation at the end of Year 1:
Asset Allocation – End of Year 1
If you extrapolate the 1.4% increase in stock allocation for year one, the effect can be significant over time. I’ve seen it firsthand, with my stock allocation increasing to 72% since my retirement in 2018 (driven by the above-average equity returns). Despite the higher allocation to stocks, I feel confident about my risk exposure to a market downturn, as I still have 11 years of “protection” in Buckets 1 and 2.
That’s been one of the biggest realizations I’ve had after using the strategy for 8 years. The higher exposure to equities also increases my protection against longevity and inflation risk. It’s a real-life example of the reverse glide path in action, and I’m pleased with the unexpected benefit of using The Bucket Strategy.
End of Year 2 – A Bear Market (Before Rebalancing)
In Year 2, spending remains steady at $50k, but the 15% decline in stocks drove a Net Worth decline of $180k (from $1.56M to $1.38M). If you look at the Asset Classes, you’ll see the cash and bonds had positive returns, but insufficient to offset the stock losses. And yes, I know a Bear Market is technically a 20% decline, but I’m assuming the bear happened mid-year and the year-end result was 15%. If you don’t like my approach, feel free to run your own numbers. Wink.
Year 2: Bear Market Rebalancing Strategy
As in year one, we have a $46k gap in Bucket 1 due to our spending. Since Bonds were up $16k, I’m confident using that as a partial refill of Bucket 1. However, given the stock market decline, I want to avoid selling stocks. The Bucket Strategy is designed for exactly this type of situation. I’ve still got plenty of “liquidity cushion,” so there’s no need to panic. As a result, we’ll finish our rebalancing with “only” $120k in Bucket 1, dropping our protection from 3 years ($150k) to just under 2 1/2 years ($120k), knowing we can also tap Bucket 2 if the bear market continues.
After rebalancing, our Asset Allocation is as follows:
Again, the Asset Allocation is a result of, rather than a driver for, our rebalancing moves. Our priority is to maintain as much of our 11 year buffer as possible in Buckets 1 and 2, so I’m confident with the slight decline in the allocation to stocks in return for maintaining the liquidity buffer, while also avoiding the sale of stocks after a downturn. The priority for our retirement portfolio is to protect our spending via Buckets 1 & 2, not to take advantage of every opportunity to “buy the dip.” We can debate the approach in the comments, but you must define your priorities for any system you put in place to create your retirement paycheck, and the priorities are clear in my mind.
Goal: Protect your liquidity buffer to the extent possible, while also avoiding selling stocks after a downturn.
End of Year 3: A Bull Market
Thankfully, the markets recovered in Year 3, with stocks earning a 20% return for the year. Even with our $50k of spending, our portfolio increased 11% from $1.38 M to $1.53 M.
Year 3: Bull Market Rebalancing Strategy
Since we only did a “partial refill” of Bucket 1 last year, our gap is now $77k ($73k Actual vs. $150k Target). Fortunately, the market recovery has provided the means to do a full refill, which we’ll accomplish as follows
Move $16k from Bonds to Cash (Bucket 2 to Bucket 1)
Move $61k from Stocks to Cash (Bucket 3 to Bucket 1)
After rebalancing, our Asset Allocation is as follows:
If you compare Year 3 to our starting position, you’ll notice we still have 11 years of protection in Buckets 1 & 2, but they are a smaller % of our overall allocation (combined, they represent 36% of the portfolio vs. 37% at the start of retirement). This is driven by the fact that both buckets are Time Segmented (3 years and 8 years, respectively).
Since Buckets 1 and 2 “fixed” using a time-based methodology, the growth in the overall portfolio (from $1.5M to $1.53M) falls into Bucket 3, increasing our allocation to stocks. This phenomenon will occur any time market returns exceed your Safe Withdrawal Rate over time, as has happened since my retirement in 2018. Following is a summary of S&P500 returns since my retirement (Source: Google Search):
Key Annualized Total Returns (S&P 500):
2018: -4.4%
2019: +31.5%
2020: +18.4%
2021: +28.7%
2022: -18.1%
2023: +26.3%
2024: +25.0%
2025: +17.9%
Given the above average returns since 2018, my stock allocation now represents 72% of my portfolio. I’m a conservative investor, but am comfortable with the higher stock allocation given the fact that I still have 11 years of “protection” in Buckets 1 and 2. Further, I have less anxiety about longer-term risks (longevity and inflation) given the higher allocation to the asset class most likely to mitigate those risks.
The reverse glide path in action. Michael Kitces would be proud.
In contrast, a straight “60/40” approach would increase the total bond $ holdings to more than the 8 years of time segmented protection I’m seeking. Assuming market returns exceed SWR over time, the bond portfolio would increase in $ value as the 40% allocation is maintained, which would lead to an increasing “years of spending” in Bucket 2. One could argue that the 60/40 is “easier” (thinking of you, Rob Berger, wink), but I would argue that it results in a more conservative portfolio than necessary over time, leading to increased longer-term longevity and inflation risk than would be realized if the stock allocation absorbs the entire portfolio growth. Speaking of Rob, he makes some strong arguments, which I’ll address in more detail in my next post, “Strategic Advantages of The Bucket Strategy.” He also asked anyone who is using the Bucket Strategy to explain their rebalancing logic. I hope I addressed that with today’s post, Rob (I enjoy and respect your work).
I can read your thoughts. Most of you are thinking, “Yeah, But What If….”
It’s a common response to retirement planning. I know the anxiety we all face in the final year before retirement (I wrote about it here). I encourage you to avoid Analysis Paralysis and pick a strategy that will handle the vast majority of scenarios you’re likely to encounter. For me, that’s The Bucket Strategy. Each of us must decide for ourselves what we’re comfortable with, but decide we must.
We could design 1,000 different scenarios using the methodology shared above. If you have a scenario you’re worried about, model it. It’s not hard, just build a spreadsheet and play around with as many scenarios as you’d like. It’ll take you less than an hour. I’m confident that The Bucket Strategy is flexible enough to handle most market volatility. Sure, if we end up with a stock market crash like 1929, it’ll be strained. 5 years of a bear market? Sure, it’d be brutal.
Show me a strategy that wouldn’t be impacted in that environment.
Let’s hope we never have to experience that in our retirement.
For me, the Bucket Strategy has provided the flexibility to handle volatile markets, spending modifications, and ease of implementation. In my experience, it’s easy to manage, easy to understand, and offers peace of mind.
That said, the reality is that it’s a blend of a Time Segmentation strategy (Buckets 1 and 2) and a total return portfolio, which makes it a bit difficult to comprehend (vs. a straight 60/40 rebalancing approach). Given that my priority is to protect 11 years of spending outside the stock market, it makes sense to me. Simply check your year-end balances to see how much refilling is required to build your time-based protection, and get on with living.
For me, retirement is about enjoying life while spending as little time as possible managing our portfolio. The Bucket Strategy accomplishes both. I’m sleeping well at night, spending less than 20 hours/year managing our portfolio, and getting weekly hikes in the mountains with my dog.
Life is good.
Finally, the Bucket Strategy also offers an unexpected wealth of strategic advantages. I originally included a section addressing them in this post, but due to length, I decided to strip it out and dedicate an entire article to that topic. Stay tuned…
* Minor point: When I do mid-year refills, I do look at the Asset Allocation compared to year-end values to determine which asset class to draw from (if stocks have grown more than bonds, I’ll use stocks). More importantly, during my full annual review process, the Asset Allocation is the result of (vs. the driver for) rebalancing, as outlined throughout this post. Prioritizing the Time Sequence methodology for Buckets 1 and 2 is the important part to remember.
Your Turn: How do you manage your portfolio to build a retirement paycheck? If you’re using the Bucket Strategy, has this article helped give you ideas for how to manage your annual rebalancing process? Let’s chat in the comments…
