The Three Bucket Retirement Distribution Strategy

Recently I’ve been binge listening to Rick Ferri’s Bogleheads on Investing podcast. In his third episode, he interviews Christine Benz, CFP®️, Morningstar’s Director of Personal Finance. During their interview, I was intrigued by a retirement distribution strategy that they discussed. 

From the outset, it should be noted that there are many factors that go into determining an appropriate distribution strategy for an individual investor. This shouldn’t necessarily be taken as the right strategy for you, but nonetheless it is still one worth thinking about.

The three bucket strategy.

Ms. Benz gives credit to Harold Evensky for his influence and promotion of this strategy. This technique started out with Mr. Evensky including a cash bucket component for 1-2 years of retirement living expenses, in conjunction with the long term portfolio strategy that he was managing for clients.

Why keep 1-2 years in a cash, or cash-like bucket? You might start by asking individuals who retired during the 2007-2008 financial crisis. 

Here’s what I mean. “Sequence-of-returns-risk” is a retirement risk that investors should be thinking about. If the market drops and you begin taking withdrawals from your portfolio, you may devastate your ability to have the standard of living that you were hoping for during your retirement years. Selling your hard-earned retirement assets in a down market means that you’re selling low and that you’ll have less assets in the portfolio to increase in value when the downturn ends and the market begins to grow again. Having cash on hand to weather market volatility can be an attractive way to allow your portfolio time to recover.

Ms. Benz advocates for an additional, third bucket to add to the strategy:

  • First Bucket - Two years in cash

  • Second Bucket - Eight years in high quality, short to intermediate-term bonds

  • Third Bucket - The remaining amount of your portfolio in equity

What this strategy effectively does is provide investors with a total of 10 years in less risky assets to live off of, while potentially allocating a substantial amount of their portfolio to equities. Even in a serious market downturn, having 10 years of assets in a safer allocation than stocks may go a long way to helping you sleep well at night.

An example.

Here’s an example that Rick and Christine discussed to put things in perspective. 

Consider an investor with a $2,000,000 portfolio who needs $50,000 from her portfolio each year to supplement income. There may be other income sources such as a pension or social security, but for purposes of this example, $50,000 is needed each year from the portfolio.

In order to implement this strategy, the investor would put $100,000 (two years of living expenses) in a CD or money market account (This is the first bucket). Next, the investor would put $400,000 (eight years of living expenses) into a high quality intermediate-term bond fund (This is the second bucket). 

This totals 10 years of retirement income needs, and $500,000 of the portfolio. The remaining $1,500,000 could be allocated to equity (the aggressive/“risky” third bucket).

In this case, the investor would end up with 75% of the total portfolio allocated to stocks, but with 10 years of retirement funds in less risky allocations.

Some final thoughts.

Obviously, this strategy may or may not work for you depending on a plethora of factors that are unique to your individual situation. However, it’s one worth thinking about.

There are many strategies to creating income in retirement from your hard-earned, saved money. It’s of paramount importance that you have a plan to help you achieve the greatest possibility of long-term success.


The content you just read is for informational purposes only. Yes, I’m a financial advisor, but this article really isn’t intended as advice for you specifically. Your unique situation needs to be taken into account, and the ideas presented here may not apply. 

So, please make sure you do your due diligence BEFORE implementing anything. Due diligence includes hiring a qualified professional who understands your situation completely and can offer you personalized advice.

Donovan Sanchez