What is Bucket?
Generally, the term “Bucket” refers to the categorization and grouping of the assets for retirement strategy. Usually, the bucket contains low-risk investments like cash, cash equivalents, or short-term securities.
How Bucket Strategy Works
The bucket strategy is a retirement planning method that involves dividing retirement savings into separate "buckets" according to when the funds will be needed. Each bucket is invested in different asset types to align with specific time periods.
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The short-term bucket (1-5 years) covers immediate expenses and emergencies. It includes liquid assets like cash, savings accounts, money market funds, or short-term bonds, ensuring quick access to funds when necessary.
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The medium-term bucket (5-10 years) finances near-future expenses like major vacations or home purchases. This bucket balances growth and income by investing in intermediate-term bonds, dividend-paying stocks, or balanced funds.
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The long-term bucket (10+ years) focuses on long-term growth, supporting retirement income by investing in higher-return assets such as stocks, growth funds, or real estate.
This strategy reduces risk, enhances liquidity, and simplifies retirement planning by diversifying investments across different time horizons. Liquidity in the short-term bucket allows for accessible funds, and the structured approach helps visualize retirement expenses more clearly. However, ongoing management is crucial. Portfolios may need rebalancing, and investment performance can vary, requiring adjustments. A financial advisor can provide tailored guidance to optimize the strategy for individual needs.
What are three bucket strategies?
The retirement bucket strategy can be divided into three categories:
Cash Bucket: This bucket holds enough cash in a checking or savings account to cover living expenses for approximately two years.
Fixed Income Bucket: This bucket contains bonds and other fixed-income investments to provide a stable income stream and cover living expenses for an additional five years.
Growth Bucket: This bucket invests the remaining portion of the retirement portfolio in stocks and other high-growth, high-volatility investments with the potential for long-term capital appreciation.