As individuals approach retirement, financial planning becomes increasingly important to manage assets effectively. One approach to organizing retirement savings is the Buckets of Money Strategy. This strategy helps individuals allocate investments based on short-, intermediate-, and long-term needs, providing liquidity for immediate expenses, stability for mid-term needs, and growth potential for the future. By segmenting assets into these distinct categories, retirees and pre-retirees can create a structured investment plan that balances accessibility, risk management, and long-term sustainability.
Understanding the Strategy
The Buckets of Money Strategy divides retirement savings into three distinct categories. The first is the short-term bucket, which covers immediate expenses and serves as a cash reserve. This bucket consists of highly liquid, low-risk assets such as savings accounts, money market accounts, CDs, or short-term Treasury bills. The purpose of this allocation is to ensure that essential expenses such as mortgage payments, medical costs, or planned travel can be covered without the need to sell investments during market downturns. Since economic and market fluctuations are inevitable, having readily available funds in this bucket can help individuals avoid tapping into long-term investments at inopportune times.
The intermediate-term bucket is designed for financial needs that arise within three to seven years. This portion of the strategy focuses on preserving capital while providing some income and moderate growth. Investments in this category may include high-quality bonds, conservative balanced funds, or laddered fixed-income securities. The goal of this bucket is to generate a reasonable return while limiting exposure to excessive volatility. It can be particularly useful for medium-term expenses such as home renovations, vehicle purchases, or unexpected medical costs. The intermediate bucket acts as a buffer, helping individuals transition between their immediate cash needs and their long-term investment goals without being overly reliant on either.
The long-term bucket is allocated for investments with a time horizon of seven years or more. This portion of the portfolio is designed for long-term growth and typically consists of equities, mutual funds, exchange-traded funds (ETFs), and other growth-oriented investments. Since this bucket has the longest time frame, it can better withstand short-term market fluctuations while benefiting from the potential for compounding and capital appreciation. The objective of this allocation is to keep pace with inflation and support financial needs throughout later years of retirement. Many individuals allocate a significant portion of their portfolio to this bucket, as it provides the highest potential for long-term growth and helps one work toward financial security well into the later stages of retirement.
Key Considerations
One of the key benefits of this approach is that it provides a framework for managing market volatility. The short-term bucket ensures that funds are available for immediate expenses, reducing the need to sell investments during a downturn, while the long-term bucket allows for continued market participation with a focus on growth. The intermediate-term bucket plays an essential role in bridging the gap between short-term cash needs and long-term investments, helping to manage withdrawals strategically and reduce the risk of prematurely depleting retirement savings. By structuring retirement assets in this way, individuals can establish a clearer approach to financial planning and transition into retirement with greater confidence.
Another important consideration is that the balance between these buckets should evolve over time. For example, early in retirement, an individual may allocate more funds toward growth-oriented investments in the long-term bucket to maximize returns. As they progress through retirement and begin drawing more from their assets, they may shift a larger portion of their portfolio toward intermediate and short-term assets to provide greater liquidity. Rebalancing these buckets periodically allows individuals to adjust to changing financial circumstances, economic conditions, and personal goals.
Tax efficiency is another crucial factor when implementing this strategy. Tax-deferred retirement accounts such as IRAs and 401(k)s, taxable investment accounts, and Roth IRAs all offer different tax advantages and should be utilized strategically within each bucket. For example, withdrawing from a taxable investment account first may help defer taxes on retirement accounts, allowing tax-advantaged assets to continue growing. A financial professional can help individuals structure their withdrawals in the most tax-efficient manner possible.
Implementing the Strategy
To put the Buckets of Money Strategy into action, individuals should first assess their financial needs and anticipate expenses in the short, intermediate, and long term. This assessment should include analyzing living expenses, debt obligations, healthcare costs, and discretionary spending such as travel and hobbies. Once a clear picture of financial goals is established, assets can be allocated accordingly to align with personal risk tolerance and income requirements.
Periodic reviews and adjustments are necessary to maintain appropriate funding across the buckets as financial situations evolve. For example, if an individual experiences unexpected expenses, they may need to replenish the short-term bucket by shifting assets from the intermediate-term bucket. Similarly, if market conditions change significantly, adjustments may be necessary to see to it that the long-term bucket continues to provide growth while maintaining an appropriate risk level.
Working with a financial professional can provide valuable guidance on asset allocation, tax-efficient withdrawal strategies, and approaches to maintaining income throughout retirement. A financial professional can help assess an individual’s specific situation and create a customized “bucket” strategy for their goals, risk tolerance, and anticipated expenses. Additionally, financial advisors can help monitor and rebalance the portfolio so it can work toward long-term objectives.
Conclusion
The Buckets of Money Strategy offers a structured way to manage assets by dividing them into different time horizons. By maintaining liquidity for near-term expenses, stability for mid-term needs, and long-term growth potential, individuals can navigate their financial future with greater clarity. This strategy also allows for greater flexibility, as individuals can adjust over time based on their evolving financial needs and market conditions. Through careful planning and professional guidance, this strategy can serve as an effective tool in managing financial needs throughout retirement.
While no financial strategy is one-size-fits-all, the Buckets of Money approach provides a comprehensive framework that can be customized to suit individual circumstances. By taking a thoughtful and disciplined approach to asset allocation, investors can create a plan for their current lifestyle and also one that adapts to changing needs over time. Whether planning for the early years of retirement or preparing for later stages, implementing a well-structured “bucket” strategy can be a valuable tool that increases your financial confidence.
