Not All 3-Bucket Retirement Models Are Created Equal

There are several ways to construct a 3-bucket retirement model. The right approach depends on the opportunities and constraints faced by the retiree.

Some models aim to improve returns, while others prioritize spending flexibility, liquidity, or credit risk management. Here are four variations and the problems they address.

Here, the Safety Bucket covers the next few years of expenses, while the Income Bucket covers the years immediately following.

For instance, if Safety covers years 1–5, Income covers years 6–10. This model can be particularly useful when the yield curve is steep and the Income Bucket offers a meaningfully higher return than Safety. Retirees can potentially earn more while maintaining the same 10 years of expense coverage.

In this model, Safety covers essential expenses, while Income covers discretionary spending.

This allows retirees to pursue higher returns by taking additional risk specifically with non-essential spending, rather than simply leaving that portion to the Growth Bucket.

Here, the Income Bucket refills Safety every year. The goal is to make Safety dependent on Income, rather than Growth, for refills, while ensuring that withdrawals are consistently made through Safety.

This approach may also help manage credit risk. For example, a retiree seeking 2 years of Income Bucket coverage may prefer this structure over a stacked model, where Income could be relied upon for several consecutive years. The objective is to limit prolonged reliance on Income Bucket assets.

A 3-bucket structure can also prepare for unexpected spending needs. Income can be allocated to potential spending shocks, while Safety covers regular expenses.

However, this problem can also be addressed using a 2-bucket model: Safety could cover 120% of expected expenses for the first 2 years, then 100% for the remaining coverage period.

The important point is that a 3-bucket model is not a single, standardized strategy.

Retirees seeking additional returns may prefer one structure, while those prioritizing liquidity, flexibility, or credit risk management may prefer another.

The objective isn't simply to have three buckets. It's to design a structure that addresses the retiree's specific needs and constraints.

CherishBuckets.com already supports many of these models, with more on the way.