The 3 Bucket Strategy Explained: Your Step-by-Step Guide to Smart Retirement Planning

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Planning for retirement can be challenging, especially when it comes to balancing income needs and market risks. The 3-bucket strategy offers a practical solution by dividing retirement savings into three categories: Immediate, Intermediate, and Long-Term. This approach ensures you have cash for short-term needs, stability for mid-term expenses, and growth for the future. With thoughtful planning and regular rebalancing, this strategy helps protect your savings and provides steady growth throughout your retirement years.

Most retirees need 55% to 80% of their pre-retirement income to maintain their lifestyle. This fact surprises many people planning their retirement.

The 3-bucket strategy provides a practical solution by organizing retirement assets into three key categories:

Income, Safety, and Growth

This smart approach helps you generate consistent returns while protecting your retirement savings. The Income bucket alone aims to deliver an 8% return after fees.

This strategy goes beyond basic retirement planning. Your immediate bucket should hold enough cash to cover two years of expenses. This protection helps you avoid selling investments when markets decline. Safety and growth buckets work together to make your retirement savings last throughout your later years.

Understanding the 3 Bucket Strategy for Retirement

The 3 bucket strategy divides your retirement savings into three distinct segments. Each segment plays a specific role in your retirement trip.

The first bucket, known as the immediate bucket, holds cash and liquid investments that cover your short-term needs. You should keep enough funds in this bucket to cover up to two years of expenses. This bucket focuses on preservation and has high-yield savings accounts, short-duration CDs, and U.S. T-bills.

Your intermediate bucket takes care of expenses from years three through ten of retirement. The investments in this bucket want to maintain steady growth while protecting against inflation. You’ll typically find longer-maturity bonds, preferred stocks, and income-focused investments here.

The long-term bucket works as your growth engine. It handles assets you won’t need for at least seven to ten years. You can make more aggressive investments in this bucket, particularly stocks and alternative assets, which provide better returns over time.

This well-laid-out strategy brings several advantages. Your readily available cash protects against market volatility and covers immediate needs. So when markets drop, you won’t have to sell investments at a loss to cover expenses. The strategy lets you customize based on your retirement goals while you keep a clear, documented approach to retirement planning.

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Setting Up Your Three Bucket Retirement Strategy

Planning your retirement buckets demands thoughtful consideration and smart asset allocation. You should first figure out how much you’ll spend each year in retirement. Let’s say you need $50,000 annually – your immediate bucket should have $250,000 to cover five years of expenses.

A well-laid-out allocation strategy works best. Your immediate bucket should contain 10-20% of your total retirement savings. This money stays in cash equivalents like high-yield savings accounts and short-term CDs. The bucket will give you ready access to funds during your first 1-3 years of retirement.

The intermediate bucket needs 30-40% of your savings. This money covers expenses from years 3-10 and goes into conservative to moderate-risk options like bonds, preferred stocks, and income funds. Think of this bucket as your bridge between immediate needs and long-term growth.

The long-term bucket gets the biggest share at 40-60% of your retirement savings. These funds go into growth-oriented assets like stocks, real estate, and market indexes. You won’t need to touch this money for at least 7-10 years.

Here’s how to put this plan into action:

  1. Calculate your annual retirement expenses
  2. Multiply expenses by 5 for immediate bucket funding
  3. Divide remaining assets between intermediate and long-term buckets
  4. Select appropriate investments for each bucket
  5. Set up regular monitoring schedule

Your buckets need periodic rebalancing. Move funds from higher-performing buckets to maintain your target allocations. This approach gives you stability and growth potential throughout your retirement years.

At first glance, these strategies may appear straightforward. However, when factoring in elements such as taxes, Social Security, pension plans, Medicare, and more, the process can quickly become complex. At Fuchs Financial, we specialize in developing comprehensive plans that address all these considerations. Click here to register for one of our free webinars and learn how we can help you navigate your retirement planning with confidence.

Conclusion

The 3 bucket strategy offers a straightforward way to plan your retirement. This approach protects your savings and ensures steady growth throughout retirement years. Each bucket has its own purpose – covering immediate needs, providing intermediate stability, and focusing on long-term growth.

You’ll never have to sell investments during market downturns when you implement this strategy well. The immediate bucket gives you cash for daily expenses, and your intermediate and long-term buckets continue to grow your wealth.

Success with this strategy requires several key elements. Your immediate bucket should hold 1-3 years of expenses. The intermediate bucket needs 30-40% of your funds to cover years 3-10. Your long-term bucket should contain 40-60% for growth potential. Regular reviews and rebalancing will keep your strategy on track.

FAQs

What is the 3 bucket strategy for retirement planning?

The 3 bucket strategy is an investment approach that divides retirement savings into three categories: immediate needs (0-2 years), intermediate needs (3-10 years), and long-term growth (10+ years). This method helps manage risk, ensure steady income, and promote growth throughout retirement.

How much should I allocate to each bucket in the 3 bucket strategy?

Generally, allocate 10-20% of your retirement savings to the immediate bucket, 30-40% to the intermediate bucket, and 40-60% to the long-term bucket. However, these percentages can be adjusted based on your individual retirement goals and risk tolerance.

What types of investments are suitable for each bucket?

The immediate bucket should contain cash and liquid investments like high-yield savings accounts. The intermediate bucket typically includes bonds and income-focused investments. The long-term bucket is for growth-oriented assets such as stocks and real estate.

How often should I review and rebalance my retirement buckets?

It’s important to review your bucket strategy regularly, at least annually. Rebalance by transferring funds from higher-performing buckets to maintain your target allocations. This helps ensure your strategy remains aligned with your retirement goals and market conditions.

Can the 3 bucket strategy help protect against market volatility?

Yes, the 3 bucket strategy helps protect against market volatility by ensuring you have readily available cash for immediate needs. This means you won’t need to sell investments during market downturns to cover expenses, allowing your intermediate and long-term buckets time to recover and potentially grow.

The commentary on this article reflects the personal opinions, viewpoints and analyses of the author, Eddy Agyeman, and should not be regarded as a description of advisory services provided by Foundations Investment Advisors, LLC (“Foundations”), or performance returns of any Foundations client. The views reflected in the commentary are subject to change at any time without notice. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security, or any security. Foundations manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Foundations deems reliable any statistical data or information obtained from or prepared by third party sources that is included in any commentary, but in no way guarantees its accuracy or completeness.

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