The Bucket Approach to Retirement Income
The financial and emotional shift that comes with a life transition like retirement can be daunting.
Using the nest egg you've built up — and never touched — over the past 30-40 years for income is not an easy pill to swallow.
Most people struggle not just with figuring out a withdrawal rate, but with understanding how their investment allocation actually needs to change.
Although, sometimes, it doesn't have to change the way most people think.
In my experience, people assume that once they're in the final stretch of work heading into retirement, they need to get very conservative with their investments. If they were 80% stocks / 20% bonds and cash, now they think they need to move to 60/40, or 50/50, and so on.
For the clients we serve, I mostly disagree with that adjustment as a blanket rule of thumb, for a few reasons:
1. The risk you can take in the portfolio depends entirely on your income sources once you enter the withdrawal stage — specifically, how much actually needs to come out of the portfolio.
- If I need $120k/year ($10k/month) and I have $70k coming from combined Social Security, I only need $50k from the portfolio.
- If a pension covers most of my expenses, I might not need to withdraw at all.
- Or I may need all of my income from the portfolio, but my withdrawal rate relative to my balance is so low that I'm at very little risk of ever running out of money.
2. There's often a misunderstanding of how much flexibility you can create by reallocating the underlying assets within the stock and bond mix — not swapping from stocks to bonds, but adjusting internally — without sacrificing long-term growth.
3. The decision to be less aggressive needs to be detached from the financial math entirely. I'm not suggesting you lean on a risk tolerance questionnaire — personally, I don't think those actually help. What I mean is that this decision should be looked at as a choice, not a must.
- If you have the capacity to maintain your allocation, or even get more aggressive, that's fine.
- If you have the capacity to maintain your allocation, or take on less risk without jeopardizing your long-term potential, that's fine too.
All this to say: at our firm, we walk clients through what we call the "bucket approach." The term gets used interchangeably for a lot of things across the industry — the way we use it isn't just about separating assets by risk, but also by liquidity.
Let me walk you through it.
The Bucket Approach
The bucket approach is essentially a time-horizon ladder: each bucket funds a different stretch of withdrawals, and the risk level rises as the time horizon extends. We use a software to create visuals of this:
- Bucket 1 (0–5 years): Stays liquid and stable, since you'll need this money soon — there's no room for volatility.
- Bucket 2 (5–10 years): Can absorb some ups and downs, so it's invested a bit more aggressively while still staying moderate.
- Bucket 3 (10+ years): Has the longest runway, so it can ride out market swings and lean into growth — this is the "long ball" bucket.
As Bucket 1 depletes, it typically gets refilled from Bucket 2, which in turn gets refilled from Bucket 3 as markets allow.
We set this up in practice by opening different accounts for each bucket. For example, say someone comes to us with $2.5 million in a pre-tax IRA and needs $150k/year to live on. With $75k/year coming in from Social Security, roughly $75k/year needs to come from the portfolio.
For reference, $75k/year from a $2.5 million portfolio works out to roughly a 3%/year withdrawal rate.
In this case, we'd set aside five years' worth of income needs from the portfolio into Bucket 1 — that's $75k x 5 = $375,000. Now, I know what you're thinking: this bucket isn't going to earn all that much. With rates on money markets where they are in 2026, we might see a pre-tax return of 3-5%, depending on the mix of money markets, CDs, bonds, and so on. But that's the point.
The purpose of this bucket is to fund withdrawals for the first five years of retirement while protecting that income stream from market swings — in other words, to have five years of income set aside in case markets go through a long downturn.
This does two things:
- It keeps the income stream from being disrupted.
- It creates a real sense of peace, knowing that when income is needed — even more than expected in a given year — you don't have to worry about selling stocks or bonds while they're down.
Too often, we see people come to us for help, and when we review their portfolio, they never set up the liquidity their personal income needs actually required. That can drain a portfolio quickly, especially if withdrawals are taken while stocks are down — or, as we saw in 2022, when both stocks and bonds were down at the same time.
On a related note: life always throws curveballs. So even in a scenario where markets are stable, income is being taken as planned, and an unexpected expense pops up — Bucket 1 lets you weather that storm without dipping into other parts of the portfolio.
And, as you've probably guessed from the structure, as the more aggressive allocations in Buckets 2 and 3 perform well, we peel off gains — objectively and without emotion — to refill Bucket 1 as withdrawals continue.
Constructing the Buckets
One important point: you want to make sure each bucket holds the right kind of assets. For example, aside from CDs and money markets, the longer a bond's duration, the more exposed it is to interest rate changes. So in Bucket 1, we avoid longer-duration bonds entirely and stick to short-duration instruments, which are far less sensitive to rate movements. This is meant to avoid a repeat of 2022, when most medium- to long-duration bond funds fell more than 10%.
When you get to designing Buckets 2 and 3, you also want to allocate risk thoughtfully across stocks and bonds. The goal is to create growth in these buckets while still maintaining a degree of liquidity. It's probably not a great idea to hold just one fund, one stock, or a small handful of individual stocks for the equity portion — that creates both concentration risk and liquidity risk.
Tying It All Together
My point is this: setting up a portfolio for withdrawals isn't solely about shifting to a less aggressive allocation. In our view, it's about understanding what liquidity you need and when you need it. We've helped plenty of people keep an 80/20 stocks-to-bonds-and-cash allocation intact — without sacrificing withdrawal safety or liquidity — simply by applying the structure above.
That said, I'd caution against moving from 80/20 to 60/40 purely because you're retiring. People often forget that retiring doesn't make the world any less expensive, or guarantee they'll spend less.
If someone retires at 60 and lives to 90, that's 30 more years that need to be funded — and those assets need to keep pace with inflation. In my experience, people who get too conservative too early run into trouble down the road, because their assets don't grow fast enough to keep up with inflation and life's unexpected expenses.
Before making any changes to your investments, you need a real analysis of how much you need, when you need it, and how you feel about risk when given the choice. Life is full of trade-offs — this is no different.
And when you build that analysis, don't settle for a 100-page financial plan that's obsolete the moment it's printed. Dig into what your cash flow actually looks like, when bigger expenses are coming, what your taxes might look like based on your income sources, Required Minimum Distributions, and unexpected costs.
Use your planning to shape your portfolio — not what the market is doing, what the "best" investment supposedly is, or what your friends tell you. The whole point of saving is to free you up for more meaningful work and enjoyment, not to put you at greater risk.
One last thing: update your analysis at least once a year to make sure it still reflects your life. In our experience, too many clients are still working off a "financial plan" their advisor handed them 20 years ago — which, to put it mildly, is a problem.
We handle this kind of planning for clients every day. We're happy to help — reach out if you'd like to chat.
Happy planning.