Buckets of Money: The Simplest Way to Think About Retirement Savings
Managing retirement money gets really complicated fast, but the bucket strategy can reduce some of the stress.
After decades of writing, reporting, and talking about just about every possible way to invest for retirement — and into retirement, now I’m within five years of retiring. And I find myself wanting one thing more than anything else: simplicity.
For those who consider themselves pre-retirees, it’s no longer just asking “How do I grow my money?” It’s, “How do I manage it without making a huge, expensive investing mistake at exactly the wrong time?”
When I think about that question, my thoughts turn back to one of the experts I’ve long respected: Christine Benz. I first met Christine more than 30 years ago, and over that time she’s become one of the clear-headed voices on retirement planning at Morningstar. She has a rare ability to take complicated ideas and explain them in depth in ways that actually help people make better decisions.
One concept she writes about frequently is the bucket strategy. It’s where you organize all of your retirement savings based on when you’ll need the money, rather than envisioning just one big investment account.
The first bucket is money you’ll need to spend now or next month — typically cash or cash-like investments that might cover the next year or two of living expenses. Bucket one money needs to be completely available. The goal isn’t investing it, it’s about having the money to pay your bills, and “just in case.” It’s your sleep-at-night money.
The second bucket holds money you’ll need a bit later. This is often invested safely in bonds or other relatively steady investments designed to support spending a few short years down the road without taking big risks. The point is to not commit this mid-term money to long-term investments.
Bucket three is for your longer-term investments. If you’re 60 now, you likely won’t spend this money for a long time. You have time to put it to work. This is where stock investments usually live. ETFs, index funds, individual stocks, or even real estate investments can be volatile in the short term, but over longer periods they’ve historically provided the growth retirees need to keep up with inflation. Inflation and longevity are two big risks to retirees’ savings that have to be mitigated.
Christine didn’t invent the strategy but she writes that this time-based structure helps retirees avoid one of the most stressful moments in retirement: being forced to sell stocks during a market downturn just to pay everyday expenses. If you know your near-term spending is covered, it’s easier to leave long-term investments alone and let them recover.
A simple example helps. A retiree might keep enough cash to cover the next year — or even two — of living expenses. A combination of bonds and conservative, dividend-paying stocks can help support spending after that. Stocks, ETFs, or index funds focused on growth are set aside for later years, when growth still really matters. As time passes, money is spent from the first bucket, and the others can be replenished over market cycles. It’s a way to mentally organize your money so it syncs up with how retirement actually unfolds.
Managing retirement money gets really complicated fast — taxes, lifestyle changes, family, health. One appeal of the bucket strategy is that it can reduce some of the stress of investing and make spending your savings feel more manageable.
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It’s not perfect. Managing three buckets can feel a bit complicated itself, and some critics argue that a well-diversified portfolio with a thoughtful withdrawal plan can accomplish similar goals without dividing assets into buckets. Still, this three-bucket strategy has been around for years — and there’s a reason it continues to resonate, and why Christine Benz continues to write about it.
This way of organizing your money isn’t right or wrong. It’s simply one tried-and-true way to connect your money to real life — and sometimes, that clarity makes all the difference.
P.S. If you’re reading this because you’re preparing for that first conversation about your retirement plans, you’re already doing something powerful: you’re taking ownership of your financial life.
When you’re ready, Wealthramp is here with a curated network of fiduciary, fee-only advisors who work for you — and only you.