Planning for retirement in the United States has become increasingly complex, given rising longevity, inflation uncertainty, volatile markets, and a shifting landscape of retirement income sources. Over time, I’ve learned to simplify the chaos by using a structured approach I call the Two-Bucket Retirement Plan. In this article, I will break down the concept, illustrate its practicality with numbers, show how it addresses common risks, and walk you through building one from scratch.
Understanding the Two-Bucket Retirement Plan
The Two-Bucket Retirement Plan divides retirement assets into two distinct segments:
- Bucket One: A conservative pool of highly liquid, low-volatility assets used for near-term income needs—typically covering the first five years of retirement.
- Bucket Two: A diversified portfolio of higher-growth investments designed for longer-term capital appreciation and income replenishment for Bucket One.
This division allows me to meet my short-term income needs without having to sell volatile investments during downturns.
Why a Two-Bucket Strategy Works
This strategy works by matching time horizon to investment risk. Behavioral finance research shows retirees often panic-sell when markets dip. By segregating assets, I can mentally compartmentalize my investments and avoid irrational decisions.
Let me model this mathematically. Suppose I need I dollars annually in retirement and expect to retire for T years. Let B_1 be the amount in Bucket One and B_2 the amount in Bucket Two. If Bucket One covers the first N years, then:
B_1 = I \times NThe rest goes into Bucket Two:
B_2 = (T - N) \times I \times (1 + r)^NWhere r is the expected average return per year from Bucket Two.
This staggered drawdown reduces the sequence of returns risk and maintains exposure to long-term growth.
Building Bucket One: Safety First
Bucket One’s primary goal is income preservation. I fund it with cash, CDs, short-term Treasuries, high-quality municipal bonds, and money market accounts.
Here’s a typical Bucket One allocation table:
| Asset Class | Allocation (%) | Liquidity | Risk Level |
|---|---|---|---|
| High-Yield Savings | 30% | High | Low |
| Short-Term Treasuries | 30% | High | Very Low |
| Money Market Funds | 20% | High | Very Low |
| Laddered CDs | 20% | Medium | Low |
These assets must be easily accessible and should preserve nominal value. I ensure Bucket One always covers five years of expected expenses.
Building Bucket Two: Growth with Time
Bucket Two’s goal is long-term capital growth to outpace inflation and replenish Bucket One. I use a mix of:
- US equities (broad index funds)
- International equities
- REITs
- Intermediate-term bonds
- TIPS (Treasury Inflation-Protected Securities)
A sample Bucket Two allocation may look like this:
| Asset Class | Allocation (%) | Time Horizon | Volatility |
|---|---|---|---|
| US Total Stock Market | 40% | 10+ Years | High |
| International Equities | 20% | 10+ Years | High |
| Intermediate Bonds | 20% | 5-10 Years | Medium |
| TIPS | 10% | 5-10 Years | Medium |
| REITs | 10% | 10+ Years | High |
These assets are less liquid but suited for the long haul. I reinvest dividends and rebalance periodically.
Funding and Rebalancing the Buckets
At the beginning of retirement, I sell a portion of long-term investments to fully fund Bucket One. Every year, I withdraw from Bucket One to cover expenses.
Every few years, when markets perform well, I harvest gains from Bucket Two to refill Bucket One. This is critical. I only transfer when markets are strong—never during a downturn.
Let’s do an example. Suppose I need $50,000/year for expenses, plan for 30 years in retirement, and use a 5-year Bucket One.
B_1 = 50,000 \times 5 = 250,000Assuming an average return of 6% annually from Bucket Two:
B_2 = (30 - 5) \times 50,000 \times (1 + 0.06)^5 B_2 = 25 \times 50,000 \times 1.3382 = 1,672,750Total retirement savings needed: B_1 + B_2 = 1,922,750
Comparison: Two-Bucket vs. 4% Rule
The 4% Rule assumes a static withdrawal of 4% of the initial portfolio, adjusted for inflation. While simple, it ignores market cycles and behavioral risk. The Two-Bucket Plan adds psychological and structural safety.
| Feature | Two-Bucket Plan | 4% Rule |
|---|---|---|
| Market Timing Risk | Low (segmented drawdown) | High (systematic withdrawals) |
| Inflation Protection | High (rebalancing & TIPS) | Medium (static assumptions) |
| Behavioral Safety | High (psychological separation) | Low |
| Complexity | Medium | Low |
| Sustainability | High if rebalanced well | Medium |
Social Security, Pensions, and Annuities
I integrate guaranteed income streams into Bucket One. Social Security acts as an annuity with inflation adjustment. If I receive $24,000/year from Social Security, only $26,000 needs to come from Bucket One:
B_1 = 26,000 \times 5 = 130,000This lowers the upfront cash buffer and lets more capital grow in Bucket Two.
I also evaluate annuities. A deferred income annuity starting at age 80 can reduce longevity risk and let me invest more aggressively in early retirement.
Taxes, Roth Conversions, and Asset Location
Tax efficiency is key. I keep Bucket One in taxable or Roth accounts for easy access. I shelter high-growth assets like equities in IRAs or Roths.
During early retirement years (before RMDs), I convert traditional IRA funds to Roth if my tax bracket is low. This smooths my tax profile over decades.
Suppose I convert $40,000/year for 5 years:
\text{Taxable Income} = 40,000 \times 5 = 200,000If this avoids pushing future RMDs into the 24% bracket, I save thousands over time.
Risks and How the Plan Handles Them
- Sequence of Returns Risk: Bucket One isolates spending from market shocks.
- Longevity Risk: Use annuities or delay Social Security.
- Inflation Risk: TIPS, equities, and delayed withdrawals mitigate this.
- Health Costs: Set aside an HSA or earmarked funds outside the two buckets.
Annual Maintenance Checklist
- Review expenses: Are they stable?
- Evaluate market returns: Is it time to refill Bucket One?
- Rebalance Bucket Two.
- Reassess taxes: Roth opportunities?
- Project long-term sustainability: Run updated simulations.
Conclusion: Why I Trust the Two-Bucket Method
In a world of unpredictable markets and rising retiree anxiety, I’ve found that segmenting my money into purpose-driven buckets calms my financial mind. I know my basic needs are safe. I know my growth engine runs silently in the background. I rebalance with intention—not emotion. And I adapt every year.
This plan isn’t flashy. It’s not trendy. But it’s effective. And for me, that’s enough.
