The three-bucket retirement strategy
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The three-bucket strategy splits your retirement savings by when you will spend them. As Phase 2 opens, Bucket 1 holds the next 18 months of spending, Bucket 2 the 48 months after that, and Bucket 3 the rest, invested to grow. The nearer the spending, the safer what holds it, so this year’s bills are not paid by selling shares after a fall.
The buckets as Phase 2 opens them
| Bucket | What it is for | Size | What it holds |
|---|---|---|---|
| Emergency fund | Kept aside, never spent | 12 months of spending | All in liquid and arbitrage. |
| Bucket 1 | Your spending money | 18 months | All in ultra-short debt. |
| Bucket 2 | The next few years | 48 months | Holds 80% bonds and gilts, 20% large-cap equity. |
| Bucket 3 | Long-term money | Whatever is left | Holds 80% mid/flexi-cap equity, 20% bonds and gilts. |
These are where Phase 2 starts, not advice: with a free account you can change every bucket’s size, what it holds and the tax on it. The emergency fund is filled first and never spent, so it is not counted as money to spend.
How the buckets are topped up
- Every month, your spending comes out of Bucket 1; if it runs dry, out of Bucket 2, then Bucket 3.
- At each year end, Bucket 2 tops Bucket 1 back up to 18 months of the next year’s spending. If Bucket 2 runs short, Bucket 3 pays the rest.
- At each year end, Bucket 3 tops Bucket 2 back up to 48 months of the next year’s spending.
Your spendable savings run out when Buckets 1, 2 and 3 are all empty. With these sizes, Buckets 1 and 2 hold 66 months of spending, mostly in debt.
Why people use it
- It keeps the next few years’ spending out of the share market, so a fall early in retirement does not force you to sell shares to pay this year’s bills. See Sequence of returns risk.
- It is easy to follow: each bucket has one job.
What it costs
- Debt that earns less than prices rise loses ground every year. In Phase 2’s sample, debt returns 5% to 6% a year before tax while prices rise 7%. Spent from one pot of Bucket 3’s mix, with no emergency fund and Buckets 1 and 2 at 0 months, the same savings last until year 31 rather than year 25. In 2,000 simulated markets they last 30 years in 54% of them rather than 36%, and run out by year 18 in 1 in 10 of them, against year 17 with the buckets.
- It does not remove risk. Bucket 3 still tops up Bucket 2 every year, so in a long fall it sells while prices are low. Market slump (Pro) shows what a bad start does to your plan.
- Tax matters. Tax is paid on the gains in whatever leaves a bucket, so how much you redeem, and from which bucket, changes how long your savings last.
Try it on your own figures
Phase 2 · Burndown shows, as you type, the year your spendable savings run out, or that they last all the years you plan for. Set Buckets 1 and 2 and the emergency fund to 0 months to see the same plan spent from one pot. Anyone can open its sample; a free account lets you plan with your own figures; Pro adds Tax slabs, a market slump and simulated markets, among others.
Both calculators also work in dollars, with US federal tax brackets.
Questions
What is the three-bucket retirement strategy?
A way of spending your retirement savings that splits them by when the money will be spent: the next few years’ spending in safer investments, the rest invested to grow.
How many months of spending should Buckets 1 and 2 hold?
Phase 2 opens with 18 months in Bucket 1 and 48 in Bucket 2, and lets you change both. What suits you depends on your spending, any other income and how much a fall in markets would worry you.
Is the three-bucket strategy better than spending from one pot?
Not by how long savings last, on Phase 2’s sample: one pot of Bucket 3’s mix lasts until year 31, the buckets until year 25. What the buckets give is a plan for where the next few years’ spending sits. Try both on your own figures in Phase 2.