The Bucket Strategy — Dividing Time with Cash, Bonds, and Stocks
If the stock market crashed -40% in the first year of your retirement, would you have to sell your halved stocks to cover living expenses? The bucket strategy was created precisely to avoid that moment.
What Is the Bucket Strategy?
The bucket strategy is a withdrawal method that divides retirement assets into several compartments according to "when will this money be spent?" The core idea is simple: keep money you'll spend soon safe, and let money you'll spend later grow.
The most widely used form is three buckets.
(1) Short-term bucket (cash, deposits, MMF): living expenses to be spent within the next 1-2 years, or generously within 5 years. Its value barely wavers no matter what the market does.
(2) Medium-term bucket (bonds, dividend assets): money to be spent roughly 3-10 years out. It has a higher expected return than cash but smaller swings than stocks.
(3) Long-term bucket (stocks): money to be spent after 10 years. It is highly volatile but is the portion where you expect long-term growth.
The original is a two-bucket "cash + investment" approach proposed by U.S. wealth manager Harold Evensky in 1985. The three-bucket variant dividing into cash, bonds, and stocks was later popularized by Morningstar's Christine Benz and others. Source: HumbleDollar (2026), Morningstar 'The Bucket Approach to Retirement Allocation'.
Why Divide by Time — Avoiding Forced Selling in a Crash
The scariest thing about withdrawing in retirement is the "sequence of returns." Even for the same average return, if a large crash comes early in retirement, you may deplete your principal quickly by selling fallen assets to cover living expenses.
The bucket strategy blocks this problem as follows. In a year the stock market declined, you don't touch the long-term (stock) bucket and instead draw living expenses from the short-term (cash) bucket. Stocks get time to recover, and you don't have to sell halved stocks at fire-sale prices.
Conversely, in a year the market did well, you sell some of the risen stocks to refill the cash bucket. Evensky called this the "5-year mantra": the principle that money to be spent within 5 years should never go into stocks but be kept as liquidity.
Pros and Cons — Psychological Stability vs. Rule Complexity
The biggest advantage is psychological. Knowing that "the money I need to spend right now is a few years' worth in the cash bucket" can reduce the mistake of locking in losses through panic selling in a crash. The strength to endure the maximum drawdown and recovery period comes from here.
The downsides are clear too. First, the rules are complex. Unless you decide in advance when to draw from which bucket and when to refill cash (rebalancing), you'll be swayed by emotion. Second, as the cash and bond share grows, your long-term expected return can fall accordingly.
In fact, some academic studies point out that the bucket strategy is not necessarily superior to a simple 60/40 (60% stocks, 40% bonds) allocation, and is closer to a "behavioral-economics device that puts your mind at ease." In other words, the real value of the bucket strategy may not be excess returns but the psychological structure that helps you endure a crash.
The point that the bucket strategy may not be statistically superior to 60/40 is based on research such as Javier Estrada (IESE) 'The Bucket Approach: A Suboptimal Behavioral Trick?'. Performance varies with market conditions, withdrawal rate, and rules, so we don't state it as certain.
よくある質問
Q. How many years' worth should go in the cash bucket?
There is no correct answer. Evensky's original idea was to keep 5 years of living expenses in safe assets, and in practice many divide it into 1-2 years of cash plus 3-10 years of bonds. The more cash, the longer you can endure a crash, but the less your long-term growth opportunity. Gauging the maximum drawdown and loss duration you can endure is the starting point.
Q. If I use the bucket strategy, can I avoid losses entirely?
No. The stocks in the long-term bucket still fall. What the bucket strategy eliminates is "the situation of being forced to sell fallen assets and lock in losses," not the fluctuation in asset prices itself. The maximum drawdown and recovery period still exist, and the buckets are a tool to help you get through that period without selling.
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