Early Retirement Bucket Strategy

Perhaps You have decided what your early retirement withdrawal strategy is. What if your portfolio doesn’t generate enough passive income (interest and dividends) to fund your lifestyle without tapping assets? Maybe you should consider including an Early Retirement Bucket Strategy.

A bucket strategy for retirement is just a logical method to structure an early retirement funding plan.  It helps by allowing us to visualize separate buckets and fund categories. The buckets are used over time to feed our early retirement withdrawal strategy and reduce overall concern about funding sustainability.

The Importance of Structuring the Retirement Portfolio for Income.

We normally think of our portfolio as one big pile consisting of Stocks, Bonds, and Cash. Now consider the following rotten deal happening to us. We start our early retirement withdrawal strategy using the classic 4% of portfolio withdrawal rate. We also include yearly inflation adjustments.  Then only a year or two into retirement the market takes a dive like it did in 2007 through 2008 and drops over 40%.

For this scenario example we will use a 40% percent drop against a $1million portfolio. In this nightmare we were safely pulling $40K one year but the next year our portfolio has dropped to $600K. A $40K withdrawal now puts our withdrawal rate closer to 6.6% of our portfolio total. If our portfolio wasn’t structured with enough cash we will have to sell assets at the worst possible time. A time when they are in the mud. To compound matters we may panic and pull completely out of the market and miss any recovery.

The bucket strategy for retirement’s purpose is to structure the portfolio in a way to fund our retirement even through down-market conditions.  Without having to sell assets at low values. It also gives a retiree the confidence that a market correction or crash won’t devastate their early retirement plans. This is accomplished by holding 3 to 10 years of living expenses in cash or near cash within our portfolio.

Funding Bucket Plan for Early Retirement .

The bucket strategy for retirement is an approach that separates the portfolio into three buckets or funding categories. Every year we will withdraw our yearly funding from our portfolio’s first bucket (Bucket #1). This first bucket is a liquid account like bank savings, money market fund or short-term CDs. It also includes any emergency funds we have to fund your lifestyle for the year. Bucket #1 gives up a return in exchange for safety and availability. Basically we have our current year’s living expenses held in cash to use throughout the year. Then every year we repeat the process.

Bucket #1

This bucket contains all assets needed to fund up to ten years of retirement. This bucket is ultra-conservatively invested where there is little or no market risks. Some recommend all cash while others feel that all cash is too conservative and there can also be short-term bonds. This Bucket’s purpose is to guarantee the first ten years of retirement no matter what happens with the markets.

Bucket #2

This bucket contains investments using a conservative mix of 65% to 70% in low-risk fixed-income vehicles like CDs and Bonds. Then 30% to 35% invested in dividend-paying equities like large-cap value stocks or utility stocks. Ideally this bucket starts out with as much as was invested in the first bucket. The plan for this bucket is it sits untouched and conservatively invested for the first ten years of your retirement.

Once Bucket #1 is exhausted then Bucket #2 will be used to fund your retirement until it is depleted. During this funding period there may be adjustments to your withdrawal rate based on collecting Social Security and eventually age 70 ½  RMD (Required Minimum Distribution). RMD is an IRS withdrawal obligation for any assets held within IRAs.

Bucket #3

This bucket contains investments balancing risk and return using a 50-50 mix of high quality bonds and diversified stocks or stock funds. It includes national and international companies of all sizes geared towards value versus growth. This fund should have been invested and untouched for at least 15 years now only being tapped when either bucket #2 exhausts or needing to meet age 70 ½  RMD withdrawal obligations.

Simple Hypothetical Early Retirement Bucket Strategy Example:

Hypothetical Details- Total combined retirement and investment portfolio balance= $1 Million.

Husband and Wife are both age 55 and wish to retire now and set up their Early Retirement Bucket Strategy.

Staying within conservative assumptions, they will use 4% as their withdrawal strategy without yearly inflation increases. Therefore their bucket strategy will give income of $40,000 a year.

Any other income sources like pensions and/or eventually Social Security as well as any additional interest income above assumptions will be their hedge against inflation and taxes over their long-term retirement.

Here is how their Buckets would line up

Bucket #1

Contains $400K

Return needed to be successful: 0%

Strategy: Withdraw $40K a year for 10 years while avoiding to use or touch Buckets #2 and #3. It is all cash so no market issues to worry about.

Bucket #2

Contains $400K (Some or all in IRA accounts subject to RMD)

Assumed return needed to be successful: 4%. At a 4% return rate this should grow to around $592K at the end of ten years if left untouched.

Strategy: Withdraw $40K a year for 5 years beginning age 65. Will start collecting Social Security during this time period so adjust withdrawals accordingly. Simply move yearly funding needs from Bucket #2 to Bucket #1. Continue funding your retirement after the 5 years and adjust by whatever RMD minimum withdrawals are required at age 70 1/2 from both Bucket #2 and Bucket #3. Use Bucket #2 until depleted or as needed with Bucket #3 (due to RMD) over time.

Bucket #3

Contains $200K (Some or all in IRA accounts subject to RMD)

Assumed return needed to be successful: 6%

This grows to around $479K at end of 15 years if left untouched.

Strategy: Take required minimum distributions (RMDs) beginning at age 70 ½ and use as needed for the rest of your lifetime.


The information here is based on guidelines that I have found on different financial planning sites. It is shown as a simple and conservative example of how a Bucket Strategy can work to help ensure long-term retirement funding sustainability even through a period of market turmoil or a crash.

I am sure that there are many ways to skin the bucket strategy cat. Having 10 years of Bucket #1 retirement funding in cash was used as a simple example. Certainly not everyone needs to even use a Bucket Strategy to fund their early retirement. There are other systematic approaches that would also work but for the risk averse using a Bucket Strategy may help them sleep better at night.

I am not a financial planner and offer this as information for you to digest and give your mind information to chew on. This is the kind of information I researched before I retired so that I understood all the various options and could feel comfortable pulling the plug and retiring early so I hope it helps you get there too.

As always, if you need help seek professional assistance.

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