What is the three-bucket approach?
The retirement three-bucket framework splits savings into three pools aligned with time horizons: immediate expenses, near term lifestyle spending, and long term wealth growth. The goal is to provide reliable income in retirement while dampening market swings.
How to allocate assets across the buckets
- Bucket 1 focuses on liquidity for the first 1 to 3 years of spending using cash and cash equivalents
- Bucket 2 covers the 3 to 10 year horizon with a conservative mix of bonds and dividend paying stocks to yield income with less volatility
- Bucket 3 targets long term growth and inflation protection through a diversified equity allocation and potentially real assets, assuming funds are not needed promptly
Inflation and withdrawal planning
Withdrawals should be adjusted for inflation and reviewed periodically. The framework assumes spending remains relatively stable but may require tweaks if price levels rise or medical costs increase.
Managing risk and staying flexible
- Keeping a large portion of assets in the first two buckets reduces the need to sell during market downturns
- Bucket 3 is allowed to ride out volatility given its longer horizon
- Regular rebalancing and plan reviews help adapt to changing income needs and market conditions
Getting started
Begin with a clear estimate of annual expenses, set liquidity targets, and define rebalance triggers to maintain the intended allocations across the three buckets.
