The most popular post I’ve ever written was titled How To Build A Retirement Paycheck, which outlines the details of how we were setting up The Bucket Strategy for retirement. It seems a lot of you have an interest in the topic, for good reason. Moving from the Accumulation Phase to the Withdrawal Phase is one of the biggest challenges in retirement, and The Bucket Strategy is the method we’ve chosen to manage the transition.
However, that post was missing something that several of you have asked about. The questions revolve around the issue of how to manage the bucket strategy in retirement. Since I’ve now experienced 18 months of living with The Bucket Strategy in retirement, I felt it was an appropriate time to address what we’ve been doing to manage the bucket strategy.
How do you manage the bucket strategy in retirement? Today I share the simple steps we follow to manage our buckets. Click To Tweet
Today’s post was triggered by a recent email from Neil, who’s question is similar to other inquiries I’ve received on how to manage the bucket strategy in retirement. Neil is one of only a few loyal readers I’m aware of who has read every single post I’ve written, so I’m rewarding him by sharing his well-worded email in its entirety below (thanks, Neil for your agreement to share with all of our readers).
It’s a good summary of the type of questions I get regarding how to manage the bucket strategy, so I trust all of you that have similar questions will benefit from this post.
I’ve bolded a few of the relevant highlights in the email:
The Reader E-Mail That Triggered Today’s Post:
Fritz,
I discovered your blog this year and read it from post 1 to the present. I’ve derived a tremendous amount of value from following your path. So – thank you! I’m a little older than you and deciding when to retire as I’ve reached FI, but still enjoy work and the income it brings. I have to admit that I worry a lot about the sequence of return risk. I don’t want to retire at the top of the market.
Here’s my specific question. Assume for this case study that I have $1M in my retirement fund (am planning for $40,000 in expenses), invested 60/40 (the allocation percentage is not that important for this question). If I was to implement a bucket strategy I would probably have
- $600,000 in equities
- $320,000 in bonds
- $80,000 in cash for two years of expenses.
So year 1 I withdraw $40K to live on, and the market does a 2008 and drops 50%. At the end of the year I have:
- $300,000 in equities
- $336,000 in bonds (bonds went up 5% in 2008)
- $40,000 in cash
Total assets of $676,000, with a need to withdraw $40,000 for expenses.
In that scenario, what do you do? Do you rebalance at year-end ($405K/$231K/$40K)? if you do you’ll supposedly capture the gains on the way back, but you now have less than 7 years in “safe” assets. If the market goes up in 2009, do you rebalance again? Just wondering how you see yourself implementing the bucket strategy in a down/volatile market and if there are any resources that you have used to come up with your strategy?
To Neil’s final question of “are there any resources that you have used to come up with your strategy?”, I had to confess in my response that the answer was “No”. Today, I’m rectifying that situation with this post.
This one’s for you, Neil! (You’ve earned it, I still can’t believe you’ve read every post I’ve ever written!)
How Hard Is It To Manage The Bucket Strategy?
Today, I’ll walk you through the steps I take as I manage The Bucket Strategy in retirement.
As a refresher, below is a summary outline of the strategy:

Below, I’ll outline the steps I follow now that I’m in retirement, which should answer your questions on “How to manage the bucket strategy in retirement”.
Steps To Manage The Bucket Strategy
To start, it’s worth mentioning that my bucket strategy remains exactly as outlined in the original post. At this point in retirement, I’ve not made any changes to the basic structure. I’m pleased with the effectiveness of the strategy in:
- Minimizing my worry about Sequence Of Return Risk.
- Creating a discipline to ensure we stay within our Safe Withdrawal Rate.
- Creating a methodology to deal with the unexpected expenses we all face (expensive car repair, etc.)
- Simplifying the tracking of our annual spending.
As mentioned in the original post, I still use the CapitalOne360 account as a “sub-bucket 1”, where all of our annual spending is initiated via a monthly transfer to our checking account. Determining the amount of our “monthly paycheck” is Step 1 in the process:
Step 1: Determine Your Monthly Paycheck Amount
For 2020, we’re keeping our “investment spending” consistent with our 2019 level. Given the strong growth of our portfolio in 2019, our SWR will be decreasing slightly in 2020.
Once the annual spending from investments is determined, I adjust our monthly ACH transfers from CapitalOne360 to our checking account, if required. Since no change was required for 2020, I move on to the next step.
Step 2: Refill The “Paycheck Account” for the New Year
To simplify the calculation of spending in a given year (see Step 5), I’ve found it’s easiest to refill the CapitalOne360 account at the beginning of the year and then avoid moving any additional money into the account during the year. I view it as a bit of a “Measuring Cup” approach, where the CapitalOne360 is used as a “protected” subset of Bucket 1. By avoiding moving any additional money into the account during the year, tracking our annual spending is a simple as comparing the beginning vs. the ending value, a step that gets “messy” if you have any unnecessary transactions in the account.
To manage the inevitable “slop” of moving money around, I use our Vanguard Money Market account to capture any asset sales (or unexpected income) during the year. As a general rule, I target 18 months of spending in the CapitalOne account in January, which draws down to 6 months of spending by December. Then, I use the cash in the Vanguard MMF account to refill the CapitalOne account back to the 18 month level after year-end.
Step 3: Refilling Bucket 1
The main purpose of The Bucket Strategy is to avoid selling stocks during a bear market. Since bear markets frequently start with an aggressive downward move, it’s important to us to keep our Bucket 1 as close to “full” as possible throughout the year. By looking at our CapitalOne360 balance at any point in the year, we can see how much of our Bucket 1 funds have been withdrawn (starting balance minus current balance), and how much of a “refill” is required to keep Bucket 1 “full”.
I don’t have a set schedule to refill Bucket 1, but have found I typically execute a “refill trade” 2-3 times per year. The general principle for a refill trade is this:
- If stocks are up, sell stocks.
- If stocks are down and bonds are up, sell bonds.
- If both stocks and bonds are down, continue to draw down Bucket 1 (no refill).
Of interest, all of our “refill trades” have been done via selling equities and REIT’s to date (no surprise, given the strong market since our June 2018 retirement). Since we don’t want to “disturb” our CapitalOne360 balance (see Step 2), I keep any refill money in our Vanguard MMF until the year-end, when I transfer it to CaptialOne as outlined in step 2.
A note about dividends. You could choose to redirect any dividends into your MMF rather than having them automatically reinvested. This could serve as a slow refill of Bucket 1, reducing the amount of refill trades required. We’ve not yet taken this move, but I’ve considered it.
Step 4: Rebalance Your Portfolio

Step 5: Track Your Annual Spending
We simply compare our CapitalOne360 beginning vs. ending balance and add any direct deposits we’ve had in our checking account (e.g., pension) which I track in a separate spreadsheet during the year. As simple as that, we know what we’ve spent in the previous year.
Easy…just the way I like it.
My E-Mail Response To Neil
While I had not yet written this post when I responded to Neil’s email, you’ll see consistency with the general response I provide and the detailed overview provided in this post outlining how to manage the bucket strategy.
Below is my response to Neil:
– Essentially, I attempt to always keep Bucket 1 “full” in a decent market. For example, in 2019 I’ve been selling tranches every 3-4 months to match my “paycheck withdrawals”, so my Bucket 1 has remained full in spite of my monthly paycheck. So, your example of having it fall to 1-year balance before a bear market could be mitigated a bit by keeping it topped off as long as the markets are participating.
– Secondly, I’m working to keep my Bucket 1 at 3 years, so I have a bit more dry powder than your example. Something each of us has to determine based on our risk tolerance, but something you may want to consider.
– So….if the market does a 2008, I should have close to 3 years before I’d have to react. In your specific example, I’d likely sell enough bonds (since they were up 5% in ’08) to get back to a 1-2 year cash reserve in Bucket 1. I’d also likely look at reducing the spend a bit given the bear market, so the $40k in your example may actually cover ~15+ months of living expenses.
The basic principle is to allow Bucket 1 to drop a bit in a bear and be patient refilling it until it got to <1 year of expenses. At that point, I’d look at selling anything that was up and avoid touching the equities until they had time to recover. With $336k in bonds in your example, I’d look at using that until the equity portion had rebounded. I’ve also got some other assets (eg., REITs, commodities) which I could selectively sell and am hopeful that something would be up when the equities were down, the basic premise behind having a diversified portfolio.
Good point about having other resources to go along with my (very popular) bucket post. I’ll add it to my list of posts in my queue, I think other readers would also find it of interest.
Fritz
Conclusion: How To Manage The Bucket Strategy
So there you have it, how to manage the bucket strategy in retirement. I’ve been pleasantly surprised at how easy it’s been to manage over the past 18 months but realized it’s been simplified by the strong tail-wind of the generous stock market. Even with that tail-wind, I’m comfortable that we have a plan in place for how we’ll react when the looming bear market attacks.
I’m also sleeping well at night with the benefits provided by The Bucket Strategy:
- Minimizing my worry about Sequence Of Return Risk.
- Creating a discipline to ensure we stay within our Safe Withdrawal Rate.
- Creating a methodology to deal with the unexpected expenses we all face (expensive car repair, etc.)
- Simplifying the tracking of our annual spending.
While some, like my friend Big ERN, may argue that returns could be improved by using other strategies, I am confident that the bucket strategy is the right approach for us. The value of that restful sleep is worth a bit of return, in my view.
After all, we all want to sleep well in retirement, right?
Your Turn: Are you using The Bucket Strategy to manage your withdrawal phase in retirement? If so, have I missed anything that should be included in a post about how to manage the bucket strategy? Let’s chat…
Originally posted at https://www.theretirementmanifesto.com/how-to-manage-the-bucket-strategy/
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