Great content. I use a 3 bucket strategy that is slightly modified. I have cash equal to three years expenses that aren't covered by guarenteed income. Once we start collecting SS, the amount in this bucket will be reduced. Bucket two is 100% dividend paying stocks & ETF's. The dividend total currently covers about 60% of current expenses, but once SS kicks in for me, in three years, they will cover 100% of our expenses not guarenteed. This bucket replenishes bucket 1, without pulling capital. Bucket three is simply growth, and will be used for large extras, like major home improvement, or medical expenses.
@@ncarabbit I don't have a set schedule for rebalancing. I have cash to get me through until SS, and along the way, my dividends are going into cash, which replenishes part of my expenses. For bucket two, I look for companies who have historically increased their dividend by 5% annually, which historically, will stay ahead of inflation. I will rebalance if something changes to a fund or dividend stock. If I have a GREAT year in bucket three, I may take some off the table, if I have a known large expense coming up, like a new car or large vactaion.
Anyone approaching retirement would be well-served to learn everything they possibly can about this topic, and this video is a great start! Yes, there are other strategies like the 4% rule, but the 3 bucket approach provides a great learning foundation.
Thanks for the explanation and the example. I’m doing a similar 3-bucket strategy, with income, cash, and growth buckets for retirement in a couple of years. I took a portion of my IRA’s and got an annuity. The annuity, coupled with social security, should cover the bulk of my expenses. I just need to account for inflation over time and the growth bucket should handle that. I’m currently filling the cash bucket with 5 years of “gap” expenses + emergency funds.
1st time hearing about the 3 bucket strategy for retirement... Thank you Erin for presenting this in your ever charming, informative, and easily understandable way that you always do. I'll definitely be looking more into this!
Erin, your video productions quality has certainly improved by leaps and bounds! After 40+ years of financial planning, these analogies are too elementary for me, but I get the value to others less involved in their finances. My risk tolerance and situation put me in a much more aggressive posture. If things got messy, I always have the option of beginning Social Security, which would cover all expenses, but I prefer to wait a few years, at minimum. Taking into account the outlook, I only have 6 months' expenses in the now bucket. The other 98% is in index funds and equities, the only other "bucket" I need. I encourage people to research all these financial guidelines but modify them to fit your situation and maximize your returns.
Thank you so much Erin. Having an income bucket of up to 7 years sounds a long time, especially if markets generally recover in a couple years after a crash so potentially you could be losing out on growth. I guess we're protecting those years and tailoring is key as you say. This is excellent content and can't wait for part2!
I like this channel. She doesn’t exclusively talk about the same old invest when you are young stuff. Sure that’s important but this video shows that there are more topics and things to consider besides that.
Prepping for retirement myself. Still years away, but I am a planner. Big believer in the 3 bucket strategy. I do view it slightly differently. Bucket 1: Emergency savings. Bucket 3: Long term investments. So, those two we are in sync. The second bucket, I view as more of a bridge in the event that there is an issue with the long term investments. If the S&P 500 is way down, for example, you pull from bucket #2. When the S&P 500 is up, you pull from Bucket 3. That way, you are not "selling low" on the long term investments.
Thanks Erin for this fantastic video. This is the topic am very interested in and l like how simple and clear its easy for me to understand. Thank you so much 💗😊
Another excellent video and discussion! We use a similar strategy now 3years into retirement. You put bucket 2 at 3-7 years. I think the number within that spread should depend on your horizon. At age 80, bucket three would be excess money with a short horizon. At age 65 bucket 3 would be a much longer horizon, so bucket 2 should be on the short side of that. The other major consideration that you mentioned is the OTHER income. In our case when we hit age 70, all of our “needed” income will be covered by SS. The portfolio will fund only discretionary expenses, so we can sustain a little more risk then for most of our portfolio. Our bucket 2 is strictly for the bridge to SS, and we will just use a 2 bucket strategy after that.
If you look at the total time of recovery for market dips, I would lean towards 7 years regardless of the time horizon. Joe Kuhn has some good videos on this.
@@sstrongman1667 yes I have seen his videos and agree he has some good points. But, his strategy is quite conservative and he is a bit younger. We are in no danger of running out of money, so we don’t need to be as conservative. We are also planning on spending our portfolio to near zero by age 85-90, as we have other assets to protect the back end. Personally I prefer to use a more mixed asset allocation. Joe is both time segmenting his buckets, and his investment risk which will leave a lot of unspent money which is not our goal.
If income bucket is ladder CDs, then I think cash bucket n income bucket are redundant? Also, you forgot to mention whether retirement saving is traditional or roth which impacts taxation. It’s helpful info. Thanks.
I didn't necessarily call it buckets, but I keep a 1-2 years in checking/savings, and then the bulk of our money is in brokerage accounts (pre-tax and post tax) in a 70/30 split, I pull from the bonds to replenish cash and only rebalance when the market is up. My main issue will be getting the money out of the pre-tax accounts before RMD's, recently retired and age 55.
A good video I would like to see is more detail on summer good examples of what makes up bucket 1 and some good examples on the returns you could expect. For example, 33% hysa, 33% bond ETF and 33% mmf
Great advice! We do this but didn't know what it was called. Hopefully people are selling the froth right now. So many positions are hitting my 'make me move' valuations and cash is earnng 5%. Perfect!
I'm 55-years-old and have been retired since 2016. This is the first time I've heard of the 3-bucket strategy. By accident of circumstance, I have several years worth of cash in VMFXX and SPAXX right now. The rest is in S&P 500 and total market index funds. I think I'm going to stick with that. I don't see the need for the middle bucket. My Army retirement pay will help make market downturns manageable.
You need to carve smaller cash bucket and income bucket, carve growth bucket into two investment buckets - one for stable stability investment, the other one for moderate growth or steady dividends investment.
Hi. Thanks for the great strategy. Question: I plan on retiring at 66 1/2 but waiting to take SS until 70. What would my Cash and Income buckets look like between those years (66-69) if we use the same retirement savings amount shown in your video?
Nice video - as usual. I will reiterate something I’ve written before: having additional income streams on top of social security keeps me relaxed about our personal finances. I made some great decisions to accomplish that a long time ago - and I was clueless at the time how great those decisions would turn out. With that said - showing multiple income streams in your example deserves more than a passing glance. Finally - we just purchased a new car. In a 3 bucket strategy, it was a planned purchase from the middle bucket. I actually used funds from the first bucket and the long term bucket (an IRA because of future tax liability) to fund the purchase of the new car without a car loan. I do need to replenish bucket #1 a bit - so looking forward to your next video.
I have a 3 bucket strategy for investing but it is completely different. I have one bucket for rental real estate, one bucket for ETFs, and another bucket for more speculative investments (businesses, house flipping, etc.). These 3 buckets are focused on growth, not retirement. I will probably add a fourth bucket for dividend income when i retire. Hope to live off the dividends and rents and business profits when I retire, and not have to dip into the capital.
How much you have in Bucket # one will greatly affect the aggressiveness or lack of in buckets 2 and 3. In my case bucket 2 earns me 12% passive income and bucket 3 is mostly tech high growth equities and ETF’s.
I like the bucket strategy. We have generous government pensions and little money invested. I used a bulk of my savings ti by 5 years of service so I could retire early with my full pension. But we have a good amount in HY Savings. We think this is a way to save even more and be more diversified. We have Canadian / US Tax implications.
Great content Erin. We currently have a year in our emergency fund and are working on increasing that to 3 years for the day we retire. Our goal is that have a retirement income surplus that will allow us to keep adding to our growth bucket post work paycheck and all that stuff.
it's basically the same, because you want your most appreciating type of asset, equities, to be in Roth to maximize the tax advantages. You want lower appreciating assets like bonds in tax deferred. taxable account you can hold a mix of all three buckets, although you'd still want to keep your 1-3yrs of cash and cash equivalents.
@@hanwagu9967 I disagree with how you’ve conflated the pre-retirement 3 buckets and the post-retirement 3 buckets. For example, post retirement you will likely want to spend some tax deferred each year to keep from having huge RMDs later. So instead of keeping those assets invested in stocks or bonds, you might want to move some money down into lower risks investments, even if you are keeping that money inside the tax deferred vehicle.
We use a two bucket system. The first has five to seven years expenses as defined by RMDs. I’m looking forward to the next video that talks about moving funds from the long term bucket to the shorter term bucket. I’m thinking to avoid taking it during obvious down periods of the market. The point is that you can move it to suit your needs for flexibility.
Hi Erin, yes i uße the three buçket strategy but only in my taxable account, I am just figuring out how this will work since i just retired but plan to sell equity in bucket three th fund buckets two and one, plus some distribution from ira which will be taxed as ordinary income. So, i will pay capital gains and income tax.
they aren't mutually exclusive. You generally want to hold your most appreciating assets or bucket 3 in Roth to maximize tax advantages. You would then hold bucket 2 in pre-tax in bonds and such. Bucket 1 is your taxable account, although depending on what you had access to or not and how much you were investing, you'd break your taxable acct into your overall asset allocation, too.
Recently discovered your channel, Erin. Very good content & presentation 🥇I like your bucket system, although I call them chests. The Growth bucket used to be called the War Chest but has now been renamed to the Peace Chest, to support peaceful purposes as well as long term retirement.
As always great content, you’re always on point ! I’m a self directed investor and your info is so relevant. Looking forward to the bucket management video, I lean towards all stocks, versus bond ladders. Income from blue chips I believe is a better option for me, with a good portion in high growth. Love your content!
Thank you, for sharing information about the three (3) Bucket Strategy. However, it does not really appeal to me. This is because, my normal monthly bills can be paid using my monthly checks from my pension, annuity, and social security. So, for myself it is a question of how much liquid assets do, I need to cover unplanned expenses that always come up throughout the year. Plus how each year, to re-balance my investment portfolio (i.e. what percentage should be in stable value funds, bonds, and stocks)? Currently, with the stock market at all time highs, I am 70 percent in fixed assets and 30 percent in stocks. If in the future there is a major market correction then, I will reverse this percentage (smile ... smile).
Hi Erin, great video and discussion as usual. The 3 bucket strategy is a very good approach and helps people kee things in perspective and balance overall I feel. I personally do not use the approach in the sense of seperate accounts etc to match the buckets themselves. I simply look at my overall financial picture as a whole and in the background maintain my balance similar to the approach you described. I just do in in an overall view rather than broken down and seperated. Keep up the great content and have an awesome week Erin! Larry, Central Valley, Ca.
The wife and I currently have a 3 bucket plan HYSA for emergency fund a DIVEDEND BROKERAGE ACCT for upcoming goals like home down payment about 5 years out and 2 401k's 1 ROTH 1 trad. we are putting 20% in the traditional and 10% in the ROTH.
Erin, I'm very, VERY, interested in Pt. 2! I'm also glad you brought up guaranteed streams of income like a pension, or a annuity payout, or dividends. Also (this is aimed at those who are preparing for retirement), what is your opinion about HSA accounts to pay for medical expenses? Should you build it and hold it for final life expenses, or use it and get the full tax advantages?
My plan is sort of a combination of this 3 bucket strategy and the Money Guy 3 bucket strategy. The Money Guy 3 bucket strategy categorizes accounts by tax treatment rather than when the money will be used. Their 3 buckets are tax-deferred (e.g. traditional IRA), tax-free (e.g. Roth IRA), and taxable (e.g. HYSA). My cash bucket will be a combination of various savings accounts (which are taxable) and some I-bonds (which are tax-deferred). My income bucket will be my traditional 403b money which will be converted into a TIPS ladder by the time I retire. I hope to exhaust my traditional 403b money by the time I have to make RMDs. My growth bucket will be my Roth 403b and Roth IRA money. This money will continue to grow while I spend down the traditional 403b money. I will convert my Roth assets to a more conservative portfolio (maybe 60/40 or something along those lines) as I approach age 70. By then, I will have a pension and Social Security so there will not be as much of a need for an income bucket at that time.
they aren't different. You would still use the roth, tax-deferred, and taxable, but you would keep your asset allocation of higher appreciating equities in roth, your lower appreciating assets such as bonds in tax-deferred, and everything else in taxable. If you retired earlier, you would need to rely on your taxable asset allocation of cash/cash equivalent, bonds, and equities to carry through until you are able to access your tax-deferred and roth accounts.
I'm going to retire within 3 years. Until watching this video, I have approximately 3 years of retirement withdrawals in a high yield savings account. The rest of my investments are one third each in small, medium and large cap funds. But tomorrow I'm going to look into switching some money from my investment funds into an income bucket. Thanks, Erin!!! BTW, my wife and I had lunch yesterday with our youngest and her BF. I mentioned about starting retirement accounts ASAP, and to at least contribute enough to get the full match from their workplaces. I also added in that even just $100 a month over 40 years in investments can make a big difference. I hope they heard me. I have sent links to your various videos to both our daughters 🤞
I actually like your original strategy better for optimization. Your cash bucket is good enough to handle downswing but you have a lot more invested by not putting into the income bucket.
@@poolking25 That was my original idea. The three years of withdrawal savings in high yield savings is enough to get through a down market and back on the upswing, by historic data. I do like the idea of the income bucket for more moderate risk investments and then have a third bucket to contain the high risk investments.
Very well explained and an important concept to understand. Can you cover how the three bucket strategy is related to asset allocation? In this example what would their ratio be, do you think this is pretty high on the stock side for a retired couple?
Great content, great video, and easy to understand. I am retiring in 2026 and my wife in 2027. We will have no income until 2030 and full retirement income by 2034. So besides rebalancing the buckets, each of those years are going to require a different amount in bucket one and two. For example, no income in 2028 and 2029, so the bucket one will have 2 years of all expenses and one year with partial income. In 2035, the amount will be a lot lower because of SS and pension. Does that make sense. Any advice from the group?
I guess i keep missing something. If someone can chime in, I would appreciate it. How do you fund bucket one once you start retirement? Is the 3 years of cash for bucket 1 moved from investments and turned into cash, or should i be saving 3 years worth of cash from 55 - 60? I am currently 54 and have 1 year of cash in my emergency fund. thanks.
Erin, what do you recommend for federal employees with all their money in a Traditional TSP at retirement? The bucket system won’t work in this case since it would required taking a lot of money out of the TSP and be heavily taxed. Also, TSP does not allow selling shares from a single fund so one cannot sell C Fund shares when the market is up and sell G Fund shares when the market is down.
you could build buckets within your TSP - ie move some funds from growth to more conservative vs cash like accounts - but still have them within the TSP itself
While we are quite far from retirement (maybe 6/10 or more years) I often wonder about the retirement fund allocation in different types of assets, and good withdrawal strategy. Maybe the follow-up video will answer some more questions. Thanks for this one!
You may be retiring in six years, but you may be in retirement for 30+ years. The allocation thing is nonsense. Just make sure you have 1 - 3 years expenses liquid and keep the rest in equities.
@@hogroamer260 that is what my uninformed retirement plan has. At this point of uninformed plan, I would think keeping 2-3 years of expenses in bonds/CD/FD/liquid (for market crashes during retirement) would be enough and rest of the time would sell equity to cover the expenses. Although allocations recommended are much higher in debt/bond/liquid etc.
Great video! I am retired, almost 73, and debt-free. I paid state income taxes for GA the first time in seven years. My tax guy stated that because our taxable income increased $30K since the previous year. I have purchased some T-Bills, hopefully to reduce our state taxes. What do you think?🤔
You need to assume inflation will be about three (3) percent each year. So for example, with today's high bank and credit union Certificate of Deposit (CD) rates being between 4.5 to 5.5 percent. Because of inflation your real purchasing power growth is only 1.5 to 2.5 percent (smile...smile).
I'm curious how much higher one's spending power is with this method compared to others. There is an opportunity cost with the money not invested in stocks but i wonder if that is offset by mitigating sequence of returns risk. In other words, would a 100% stock allocation in retirement actually yield better results, if one can stomach the volatility? What is the math behind this method?
As she stated using history as a guide, keeping 100 percent of your retirement in the stock market, would yield much larger financial returns. However, if the first three (3)-year period is a major stock market drop without the first bucket, you will be pulling money out at a loss. So, while you may want to pass on having the second bucket almost everybody, will need some form of the 1st and 3rd bucket (smile...smile).
@@transitengineer that makes sense logically, but I hope Erin presents a real world example in her next video. Something like: If you retired in 1966 with an all stock portfolio, your withdrawal rate would have been just 3.8% in order to not run out of money in 30 years. By structuring, funding, and withdrawing from a three-bucket portfolio in this way, you could have increased that to 5% per year.
@@hanwagu9967 but which is worse. Being a forced seller in a down market, or allocating a sizable portion away from stocks thus the lost opportunity for gains. Does having the lower risk assets to pull from actually increase your potential withdrawal rate or not. Most explanations I've seen describe the situation emotionally or comparatively between retiring in different years. What I haven't seen is the next step where someone takes that failing year, where stocks fall early in retirement, and makes it successful using a different strategy, like the three-buckets. So do they just feel good, or are they actually, calculably, better?
With your example, you used an average social security income and average living expenses, but a much higher than average retirement savings. It would be better to see this system used with a more average retirement savings amount of between $100,000 and $300,000
True, you make an excellent point. Retired in my early 60's, last year and while my goal was to have saved $500,000, I had retirement funds of only about $350,000. However, my home is fully paid off, have no college loans, no automobile loans, and no credit card debit. My basic monthly bills are paid using my pension, annuity, and social security (smile ... smile).
I like the idea of the 3-bucket strategy as a high-concept ideal... but in practicality life just gets so much messier than that. I mean, an HSA is a prime example here. I have an HSA, and we max it out, and we have 2 years worth of medical premiums in cash, and are finally at a point where anything additional is getting invested. When we retire, we will be actively using the HSA for medical expenses. We will also have more of the account transferred from being invested to cash as we will be actively pulling from the account and don't want to be a forced seller when the market is down. But we will also have some of the account still invested... so it is all 3 buckets in one, but specific towards medical expenses in scope. In more practical terms, I plan to look at it less like a bucket strategy, and more like... well, like I view finances now. You have income, and you have expenses, and if there is a shortfall then you need to know what to pull on first, and if you can leave some things invested, then leave it alone to grow. So I guess the overall methodology is like a 3-bucket method... but just not so cleanly across account types. My general rule of thumbs are this; 1) Keep your income and expenses in mind. There are a few rules unique to retirement, but you likely have SSA, RMDs, and possibly rental properties, patents, and other non-retirement assets that pay you money even though you stop working. Especially with RMDs, after the first couple years, you may be forced to take out far more than you think is necessary between year 3 and 15 and then your RMDs might calm down a bit. I guess, don't assume that you are selling assets for income in retirement, especially through the worst of the RMD bump, because you may find that you have more income than you need/want for a bit. But just like normal budgeting, keep 3-6mo of liquid cash for emergencies and cashflow choke points. Nothing here changes from normal just because you are retired. 2) Keep a liquid, or cash-like account to protect investments. Funds capable of covering 3-5 years worth of your minimum required expenses, which may be partially locked in things like CDs, but is generally available. The whole point of this fund is to prevent you from being a forced seller. You will have some income, and this will be somewhat invested, so even though the balance may be 3-5 years of expenses, the burn-rate should be closer to 10 years. When markets are down, then pull from this instead of other assets, and when markets are high then replenish this acct. But with a 10 year burn rate, you should never been in a position of 'needing' to sell. 2.5) Cashflow assets: Rental properties, dividend investing, etc. This is stuff that works in conjunction with bucket 2. When markets are high, take the cash as part of your bucket 1 income. When markets are low, or if you have a surplus, then reinvest this bucket, while using bucket 2 to make up for any shortfalls. But between bucket 2 and 2.5 you shouldn't ever be put in a situation where any real growth assets are ever sold short. 3) long-term investments: S&P500 simple growth investments. Preverably inside of a Roth or HSA account where you get the tax advantages. When times are doing great, sell off some to refill other buckets. When times suck, then leave it alone to grow. How those buckets are divided up between acocunts... oh boy... that is a whole other mess and highly dependant on a person's situation and opportunities. But I think that is the general idea.
I understand exactly the cash and growth buckets perfectly. However, the Income bucket seems to confuse me a little bit. Is it the money I will need for each of the future years 3,4,5,6, and 7 or is it an amount that is equal to anywhere from 3 to 7 years of time? It seems that is the former, but in the video you said "money that I will need in the next 3 to 7 years".
I'd love to see a how to withdraw money in retirement.. Do you take all the money for each year in January or throughout the year? What happens if the market is up or down? Do you use a 1-2 year emergency fund if the market is down? Thanks for the great content!
I was literally just thinking the same thing! Say if I retire at 55, do I take a years worth of salary from a 401 all in January, or space it out over several months or the year?! 🤷♂️
@@brandon8531I retired at 59.5 yrs and had a set sum withdrawn monthly until age 62. I was afraid a lump sum yearly might be to tempting and end up spending it all before the year was up. This money was from a 457 account and at 62 I still had my 401k plus savings. I also had 2 pensions to add to the 457 withdrawals.
Your content is great and not drowning in finance technical jargon. You are performing an excellent service for the YT community.
We're not here for production quality, but thanks for doing the update! I love your down-to-earth approach--thanks for all your videos.
Love you redoing some of the old videos. Nice to hear stuff again after a while. Thank you!
Great content. I use a 3 bucket strategy that is slightly modified. I have cash equal to three years expenses that aren't covered by guarenteed income. Once we start collecting SS, the amount in this bucket will be reduced. Bucket two is 100% dividend paying stocks & ETF's. The dividend total currently covers about 60% of current expenses, but once SS kicks in for me, in three years, they will cover 100% of our expenses not guarenteed. This bucket replenishes bucket 1, without pulling capital. Bucket three is simply growth, and will be used for large extras, like major home improvement, or medical expenses.
We think alike great plan
I am working toward something similar to this.
How often do you rebalance this 3 bucket strategy?
@@ncarabbit I don't have a set schedule for rebalancing. I have cash to get me through until SS, and along the way, my dividends are going into cash, which replenishes part of my expenses. For bucket two, I look for companies who have historically increased their dividend by 5% annually, which historically, will stay ahead of inflation. I will rebalance if something changes to a fund or dividend stock. If I have a GREAT year in bucket three, I may take some off the table, if I have a known large expense coming up, like a new car or large vactaion.
I like that strategy
Anyone approaching retirement would be well-served to learn everything they possibly can about this topic, and this video is a great start!
Yes, there are other strategies like the 4% rule, but the 3 bucket approach provides a great learning foundation.
The 4% rule still applies for withdrawal.
My mom is approaching retirement age and asking me all these questions. I will definitely send her this video
That makes me so happy!
I don't consider anything you have done as "sub-par".
I manage my own retirement funds and planning. This is on target with what I am doing.
absolutely will use this 3 bucket strategy- I have already started getting my buckets into place and I am 5-7 years from hopefully planned retirement
Thanks for the explanation and the example. I’m doing a similar 3-bucket strategy, with income, cash, and growth buckets for retirement in a couple of years. I took a portion of my IRA’s and got an annuity. The annuity, coupled with social security, should cover the bulk of my expenses. I just need to account for inflation over time and the growth bucket should handle that. I’m currently filling the cash bucket with 5 years of “gap” expenses + emergency funds.
Good stuff - very helpful!! We're 55 - looking to retire at 60. This will work perfectly with what we're planning! Thank you!
1st time hearing about the 3 bucket strategy for retirement... Thank you Erin for presenting this in your ever charming, informative, and easily understandable way that you always do. I'll definitely be looking more into this!
Erin, your video productions quality has certainly improved by leaps and bounds!
After 40+ years of financial planning, these analogies are too elementary for me, but I get the value to others less involved in their finances. My risk tolerance and situation put me in a much more aggressive posture. If things got messy, I always have the option of beginning Social Security, which would cover all expenses, but I prefer to wait a few years, at minimum. Taking into account the outlook, I only have 6 months' expenses in the now bucket. The other 98% is in index funds and equities, the only other "bucket" I need. I encourage people to research all these financial guidelines but modify them to fit your situation and maximize your returns.
Thank you so much Erin. Having an income bucket of up to 7 years sounds a long time, especially if markets generally recover in a couple years after a crash so potentially you could be losing out on growth. I guess we're protecting those years and tailoring is key as you say. This is excellent content and can't wait for part2!
I like this channel. She doesn’t exclusively talk about the same old invest when you are young stuff. Sure that’s important but this video shows that there are more topics and things to consider besides that.
Thanks for posting Erin. Very interesting idea. Keep up the informative videos.
Cheers
Excellent video. Example SS income numbers seem quite low for the total portfolio but doesn't really matter. You explained concept very well.
I am about 10-15 years from retirement and yes, this sounds like a good strategy
I had a similar plan for rolling CDs for my emergency fund. Not as refined as the 3 bucket strategy.
Great video! Thank you for sharing what you’ve learned.
Prepping for retirement myself. Still years away, but I am a planner. Big believer in the 3 bucket strategy. I do view it slightly differently. Bucket 1: Emergency savings. Bucket 3: Long term investments. So, those two we are in sync. The second bucket, I view as more of a bridge in the event that there is an issue with the long term investments. If the S&P 500 is way down, for example, you pull from bucket #2. When the S&P 500 is up, you pull from Bucket 3. That way, you are not "selling low" on the long term investments.
Nice analysis. Apparently I have already been doing this, but have not been calling it ‘3 Buckets’.
Thanks for the jargon! 😊
love this strategy, great explanation
Glad you liked it!
Erin is good with money!
And she talks it too...
@@richsamuel2922imagine that
😂
Thanks Erin for this fantastic video.
This is the topic am very interested in and l like how simple and clear its easy for me to understand.
Thank you so much 💗😊
Another excellent video and discussion!
We use a similar strategy now 3years into retirement.
You put bucket 2 at 3-7 years. I think the number within that spread should depend on your horizon. At age 80, bucket three would be excess money with a short horizon. At age 65 bucket 3 would be a much longer horizon, so bucket 2 should be on the short side of that.
The other major consideration that you mentioned is the OTHER income. In our case when we hit age 70, all of our “needed” income will be covered by SS. The portfolio will fund only discretionary expenses, so we can sustain a little more risk then for most of our portfolio. Our bucket 2 is strictly for the bridge to SS, and we will just use a 2 bucket strategy after that.
If you look at the total time of recovery for market dips, I would lean towards 7 years regardless of the time horizon. Joe Kuhn has some good videos on this.
@@sstrongman1667 yes I have seen his videos and agree he has some good points.
But, his strategy is quite conservative and he is a bit younger.
We are in no danger of running out of money, so we don’t need to be as conservative. We are also planning on spending our portfolio to near zero by age 85-90, as we have other assets to protect the back end.
Personally I prefer to use a more mixed asset allocation.
Joe is both time segmenting his buckets, and his investment risk which will leave a lot of unspent money which is not our goal.
If income bucket is ladder CDs, then I think cash bucket n income bucket are redundant?
Also, you forgot to mention whether retirement saving is traditional or roth which impacts taxation.
It’s helpful info. Thanks.
Appreciate the content and clear explanations. I’m currently trying to get my girlfriend up to speed financially and your videos do help.
Thanks so much for sharing!
I didn't necessarily call it buckets, but I keep a 1-2 years in checking/savings, and then the bulk of our money is in brokerage accounts (pre-tax and post tax) in a 70/30 split, I pull from the bonds to replenish cash and only rebalance when the market is up. My main issue will be getting the money out of the pre-tax accounts before RMD's, recently retired and age 55.
A good video I would like to see is more detail on summer good examples of what makes up bucket 1 and some good examples on the returns you could expect. For example, 33% hysa, 33% bond ETF and 33% mmf
Great advice! We do this but didn't know what it was called. Hopefully people are selling the froth right now. So many positions are hitting my 'make me move' valuations and cash is earnng 5%. Perfect!
I'm 55-years-old and have been retired since 2016. This is the first time I've heard of the 3-bucket strategy. By accident of circumstance, I have several years worth of cash in VMFXX and SPAXX right now. The rest is in S&P 500 and total market index funds. I think I'm going to stick with that. I don't see the need for the middle bucket. My Army retirement pay will help make market downturns manageable.
You need to carve smaller cash bucket and income bucket, carve growth bucket into two investment buckets - one for stable stability investment, the other one for moderate growth or steady dividends investment.
Thanks Erin. Looking forward to the next video 🤗
Excellent presentation
Hi. Thanks for the great strategy. Question: I plan on retiring at 66 1/2 but waiting to take SS until 70. What would my Cash and Income buckets look like between those years (66-69) if we use the same retirement savings amount shown in your video?
Very helpful. Thank you!
Great overview of this strategy, thanks!
Nice video - as usual.
I will reiterate something I’ve written before: having additional income streams on top of social security keeps me relaxed about our personal finances. I made some great decisions to accomplish that a long time ago - and I was clueless at the time how great those decisions would turn out.
With that said - showing multiple income streams in your example deserves more than a passing glance.
Finally - we just purchased a new car. In a 3 bucket strategy, it was a planned purchase from the middle bucket. I actually used funds from the first bucket and the long term bucket (an IRA because of future tax liability) to fund the purchase of the new car without a car loan.
I do need to replenish bucket #1 a bit - so looking forward to your next video.
No better time to replenish than at all-time market highs. Do it now!
Great video! Looking forward to the next one...
I have a 3 bucket strategy for investing but it is completely different. I have one bucket for rental real estate, one bucket for ETFs, and another bucket for more speculative investments (businesses, house flipping, etc.).
These 3 buckets are focused on growth, not retirement. I will probably add a fourth bucket for dividend income when i retire. Hope to live off the dividends and rents and business profits when I retire, and not have to dip into the capital.
thanks so much for sharing your approach!
Great video Erin. Very helpful to me. Thank you soooo much!
Thanks Erin!
Exceptionally well done. Thank you! I’m glad you remade this video. :-)
Thank you very much!
How much you have in Bucket # one will greatly affect the aggressiveness or lack of in buckets 2 and 3. In my case bucket 2 earns me 12% passive income and bucket 3 is mostly tech high growth equities and ETF’s.
6 months emergency expenses and the rest in dividend producing investments covering life. Leave principle alone. Life is good.
I like the bucket strategy. We have generous government pensions and little money invested. I used a bulk of my savings ti by 5 years of service so I could retire early with my full pension. But we have a good amount in HY Savings. We think this is a way to save even more and be more diversified. We have Canadian / US Tax implications.
Always a 👍 for Erin!
Thanks!
Thanks Erin. Great topic.
Excellent tutorial on the bucket strategy. I am looking forward to your next video on this topic. Great TH-camr !
Thank you!🙏
Great content Erin. We currently have a year in our emergency fund and are working on increasing that to 3 years for the day we retire. Our goal is that have a retirement income surplus that will allow us to keep adding to our growth bucket post work paycheck and all that stuff.
This is anew idea for me and I will evaluate it. Thank you for the video! :)
Great episode. I always thought of the three bucket strategy as taxable, tax deferred and Roth. I like this version too.
it's basically the same, because you want your most appreciating type of asset, equities, to be in Roth to maximize the tax advantages. You want lower appreciating assets like bonds in tax deferred. taxable account you can hold a mix of all three buckets, although you'd still want to keep your 1-3yrs of cash and cash equivalents.
@@hanwagu9967
I disagree with how you’ve conflated the pre-retirement 3 buckets and the post-retirement 3 buckets.
For example, post retirement you will likely want to spend some tax deferred each year to keep from having huge RMDs later. So instead of keeping those assets invested in stocks or bonds, you might want to move some money down into lower risks investments, even if you are keeping that money inside the tax deferred vehicle.
We use a two bucket system. The first has five to seven years expenses as defined by RMDs. I’m looking forward to the next video that talks about moving funds from the long term bucket to the shorter term bucket. I’m thinking to avoid taking it during obvious down periods of the market. The point is that you can move it to suit your needs for flexibility.
Hi Erin, yes i uße the three buçket strategy but only in my taxable account, I am just figuring out how this will work since i just retired but plan to sell equity in bucket three th fund buckets two and one, plus some distribution from ira which will be taxed as ordinary income. So, i will pay capital gains and income tax.
Great video!
I must have listened to too much The Money Guys because I immediately went to Roth, Pretax and Post tax as the buckets 😅
That's where my mind went too! I also listen to them.
they aren't mutually exclusive. You generally want to hold your most appreciating assets or bucket 3 in Roth to maximize tax advantages. You would then hold bucket 2 in pre-tax in bonds and such. Bucket 1 is your taxable account, although depending on what you had access to or not and how much you were investing, you'd break your taxable acct into your overall asset allocation, too.
You are doing a very good job with your video content Erin. Thank you for the videos and for all the work you put into it ❤.
Thank you so much!
Love the UP t-shirt in the old video!
Recently discovered your channel, Erin. Very good content & presentation 🥇I like your bucket system, although I call them chests. The Growth bucket used to be called the War Chest but has now been renamed to the Peace Chest, to support peaceful purposes as well as long term retirement.
I’m actually doing the 3 bucket strategy and wasn’t aware..lol..nice video
As always great content, you’re always on point ! I’m a self directed investor and your info is so relevant. Looking forward to the bucket management video, I lean towards all stocks, versus bond ladders. Income from blue chips I believe is a better option for me, with a good portion in high growth. Love your content!
I do plan to use a similar method
We’re using the 3 bucket strategy as well. I really like your explanation of this strategy as it all makes sense.
Thank you, for sharing information about the three (3) Bucket Strategy. However, it does not really appeal to me. This is because, my normal monthly bills can be paid using my monthly checks from my pension, annuity, and social security. So, for myself it is a question of how much liquid assets do, I need to cover unplanned expenses that always come up throughout the year. Plus how each year, to re-balance my investment portfolio (i.e. what percentage should be in stable value funds, bonds, and stocks)? Currently, with the stock market at all time highs, I am 70 percent in fixed assets and 30 percent in stocks. If in the future there is a major market correction then, I will reverse this percentage (smile ... smile).
Really great video Erin. Looking forward to the next!
Thanks so much!!
Hi Erin, great video and discussion as usual. The 3 bucket strategy is a very good approach and helps people kee things in perspective and balance overall I feel. I personally do not use the approach in the sense of seperate accounts etc to match the buckets themselves. I simply look at my overall financial picture as a whole and in the background maintain my balance similar to the approach you described. I just do in in an overall view rather than broken down and seperated. Keep up the great content and have an awesome week Erin! Larry, Central Valley, Ca.
Love it
I love the 3 bucket strategy.
Really looking forward to tke next video to hear what your strategy is!
Great content 🎉🎉🎉🎉
The wife and I currently have a 3 bucket plan HYSA for emergency fund a DIVEDEND BROKERAGE ACCT for upcoming goals like home down payment about 5 years out and 2 401k's 1 ROTH 1 trad. we are putting 20% in the traditional and 10% in the ROTH.
My three buckets are: Social Security, Pension and the third bucket has a big hole in it. I call it the debt bucket and it’s the largest.
😂😂
Erin, I'm very, VERY, interested in Pt. 2! I'm also glad you brought up guaranteed streams of income like a pension, or a annuity payout, or dividends. Also (this is aimed at those who are preparing for retirement), what is your opinion about HSA accounts to pay for medical expenses? Should you build it and hold it for final life expenses, or use it and get the full tax advantages?
Thank you so much, this is helpful
My plan is sort of a combination of this 3 bucket strategy and the Money Guy 3 bucket strategy. The Money Guy 3 bucket strategy categorizes accounts by tax treatment rather than when the money will be used. Their 3 buckets are tax-deferred (e.g. traditional IRA), tax-free (e.g. Roth IRA), and taxable (e.g. HYSA). My cash bucket will be a combination of various savings accounts (which are taxable) and some I-bonds (which are tax-deferred). My income bucket will be my traditional 403b money which will be converted into a TIPS ladder by the time I retire. I hope to exhaust my traditional 403b money by the time I have to make RMDs. My growth bucket will be my Roth 403b and Roth IRA money. This money will continue to grow while I spend down the traditional 403b money. I will convert my Roth assets to a more conservative portfolio (maybe 60/40 or something along those lines) as I approach age 70. By then, I will have a pension and Social Security so there will not be as much of a need for an income bucket at that time.
nice approach!!
they aren't different. You would still use the roth, tax-deferred, and taxable, but you would keep your asset allocation of higher appreciating equities in roth, your lower appreciating assets such as bonds in tax-deferred, and everything else in taxable. If you retired earlier, you would need to rely on your taxable asset allocation of cash/cash equivalent, bonds, and equities to carry through until you are able to access your tax-deferred and roth accounts.
I'm going to retire within 3 years. Until watching this video, I have approximately 3 years of retirement withdrawals in a high yield savings account. The rest of my investments are one third each in small, medium and large cap funds. But tomorrow I'm going to look into switching some money from my investment funds into an income bucket. Thanks, Erin!!! BTW, my wife and I had lunch yesterday with our youngest and her BF. I mentioned about starting retirement accounts ASAP, and to at least contribute enough to get the full match from their workplaces. I also added in that even just $100 a month over 40 years in investments can make a big difference. I hope they heard me. I have sent links to your various videos to both our daughters 🤞
I actually like your original strategy better for optimization. Your cash bucket is good enough to handle downswing but you have a lot more invested by not putting into the income bucket.
@@poolking25 That was my original idea. The three years of withdrawal savings in high yield savings is enough to get through a down market and back on the upswing, by historic data. I do like the idea of the income bucket for more moderate risk investments and then have a third bucket to contain the high risk investments.
@@tothra stick to original idea, 7 years of funds in conservative investments is way too conservative imo
Very well explained and an important concept to understand. Can you cover how the three bucket strategy is related to asset allocation? In this example what would their ratio be, do you think this is pretty high on the stock side for a retired couple?
Great content, great video, and easy to understand.
I am retiring in 2026 and my wife in 2027. We will have no income until 2030 and full retirement income by 2034. So besides rebalancing the buckets, each of those years are going to require a different amount in bucket one and two. For example, no income in 2028 and 2029, so the bucket one will have 2 years of all expenses and one year with partial income. In 2035, the amount will be a lot lower because of SS and pension.
Does that make sense. Any advice from the group?
I would add gold bucket too
I guess i keep missing something. If someone can chime in, I would appreciate it. How do you fund bucket one once you start retirement? Is the 3 years of cash for bucket 1 moved from investments and turned into cash, or should i be saving 3 years worth of cash from 55 - 60? I am currently 54 and have 1 year of cash in my emergency fund. thanks.
great job on the video
One of your best videos....good examples of the 3 bucket strategy.
Well explained 🎉
Erin, what do you recommend for federal employees with all their money in a Traditional TSP at retirement? The bucket system won’t work in this case since it would required taking a lot of money out of the TSP and be heavily taxed. Also, TSP does not allow selling shares from a single fund so one cannot sell C Fund shares when the market is up and sell G Fund shares when the market is down.
you could build buckets within your TSP - ie move some funds from growth to more conservative vs cash like accounts - but still have them within the TSP itself
Which bucket would you use for the tax-free funds like IULs, and Roth IRAs/401K?
While we are quite far from retirement (maybe 6/10 or more years) I often wonder about the retirement fund allocation in different types of assets, and good withdrawal strategy.
Maybe the follow-up video will answer some more questions.
Thanks for this one!
You may be retiring in six years, but you may be in retirement for 30+ years. The allocation thing is nonsense. Just make sure you have 1 - 3 years expenses liquid and keep the rest in equities.
@@hogroamer260 that is what my uninformed retirement plan has.
At this point of uninformed plan, I would think keeping 2-3 years of expenses in bonds/CD/FD/liquid (for market crashes during retirement) would be enough and rest of the time would sell equity to cover the expenses.
Although allocations recommended are much higher in debt/bond/liquid etc.
Content arc cooking up, nice 👍
Great video! I am retired, almost 73, and debt-free. I paid state income taxes for GA the first time in seven years. My tax guy stated that because our taxable income increased $30K since the previous year. I have purchased some T-Bills, hopefully to reduce our state taxes. What do you think?🤔
Thank you very much!
Why have you not considered inflation for deciding amounts in 2nd and 3rd buckets
I really miss the impact of inflation. How does it affect cash and other fixed income?
You need to assume inflation will be about three (3) percent each year. So for example, with today's high bank and credit union Certificate of Deposit (CD) rates being between 4.5 to 5.5 percent. Because of inflation your real purchasing power growth is only 1.5 to 2.5 percent (smile...smile).
Always good to see a quote from Pirates of the Caribbean, lol (guidelines)
I loved the video, thanks for the amazing information. Is that the strategy you plan to use in retirement? If not, what is yours?
Would love to know what REIT's are. ?? Never heard of them.
REIT = Real Estate Investment Trust.
The most famous one is Realty Income but there are others that are good too.
I'm curious how much higher one's spending power is with this method compared to others. There is an opportunity cost with the money not invested in stocks but i wonder if that is offset by mitigating sequence of returns risk.
In other words, would a 100% stock allocation in retirement actually yield better results, if one can stomach the volatility?
What is the math behind this method?
As she stated using history as a guide, keeping 100 percent of your retirement in the stock market, would yield much larger financial returns. However, if the first three (3)-year period is a major stock market drop without the first bucket, you will be pulling money out at a loss. So, while you may want to pass on having the second bucket almost everybody, will need some form of the 1st and 3rd bucket (smile...smile).
@@transitengineer that makes sense logically, but I hope Erin presents a real world example in her next video.
Something like:
If you retired in 1966 with an all stock portfolio, your withdrawal rate would have been just 3.8% in order to not run out of money in 30 years. By structuring, funding, and withdrawing from a three-bucket portfolio in this way, you could have increased that to 5% per year.
it's not a matter of stomaching the volatility, it's a matter of not being a forced seller in a down market.
@@hanwagu9967 but which is worse. Being a forced seller in a down market, or allocating a sizable portion away from stocks thus the lost opportunity for gains. Does having the lower risk assets to pull from actually increase your potential withdrawal rate or not.
Most explanations I've seen describe the situation emotionally or comparatively between retiring in different years. What I haven't seen is the next step where someone takes that failing year, where stocks fall early in retirement, and makes it successful using a different strategy, like the three-buckets.
So do they just feel good, or are they actually, calculably, better?
With your example, you used an average social security income and average living expenses, but a much higher than average retirement savings. It would be better to see this system used with a more average retirement savings amount of between $100,000 and $300,000
True, you make an excellent point. Retired in my early 60's, last year and while my goal was to have saved $500,000, I had retirement funds of only about $350,000. However, my home is fully paid off, have no college loans, no automobile loans, and no credit card debit. My basic monthly bills are paid using my pension, annuity, and social security (smile ... smile).
I like the idea of the 3-bucket strategy as a high-concept ideal... but in practicality life just gets so much messier than that.
I mean, an HSA is a prime example here. I have an HSA, and we max it out, and we have 2 years worth of medical premiums in cash, and are finally at a point where anything additional is getting invested. When we retire, we will be actively using the HSA for medical expenses. We will also have more of the account transferred from being invested to cash as we will be actively pulling from the account and don't want to be a forced seller when the market is down. But we will also have some of the account still invested... so it is all 3 buckets in one, but specific towards medical expenses in scope.
In more practical terms, I plan to look at it less like a bucket strategy, and more like... well, like I view finances now. You have income, and you have expenses, and if there is a shortfall then you need to know what to pull on first, and if you can leave some things invested, then leave it alone to grow.
So I guess the overall methodology is like a 3-bucket method... but just not so cleanly across account types.
My general rule of thumbs are this;
1) Keep your income and expenses in mind. There are a few rules unique to retirement, but you likely have SSA, RMDs, and possibly rental properties, patents, and other non-retirement assets that pay you money even though you stop working. Especially with RMDs, after the first couple years, you may be forced to take out far more than you think is necessary between year 3 and 15 and then your RMDs might calm down a bit.
I guess, don't assume that you are selling assets for income in retirement, especially through the worst of the RMD bump, because you may find that you have more income than you need/want for a bit.
But just like normal budgeting, keep 3-6mo of liquid cash for emergencies and cashflow choke points. Nothing here changes from normal just because you are retired.
2) Keep a liquid, or cash-like account to protect investments. Funds capable of covering 3-5 years worth of your minimum required expenses, which may be partially locked in things like CDs, but is generally available.
The whole point of this fund is to prevent you from being a forced seller. You will have some income, and this will be somewhat invested, so even though the balance may be 3-5 years of expenses, the burn-rate should be closer to 10 years. When markets are down, then pull from this instead of other assets, and when markets are high then replenish this acct. But with a 10 year burn rate, you should never been in a position of 'needing' to sell.
2.5) Cashflow assets: Rental properties, dividend investing, etc. This is stuff that works in conjunction with bucket 2. When markets are high, take the cash as part of your bucket 1 income. When markets are low, or if you have a surplus, then reinvest this bucket, while using bucket 2 to make up for any shortfalls. But between bucket 2 and 2.5 you shouldn't ever be put in a situation where any real growth assets are ever sold short.
3) long-term investments: S&P500 simple growth investments. Preverably inside of a Roth or HSA account where you get the tax advantages. When times are doing great, sell off some to refill other buckets. When times suck, then leave it alone to grow.
How those buckets are divided up between acocunts... oh boy... that is a whole other mess and highly dependant on a person's situation and opportunities. But I think that is the general idea.
I understand exactly the cash and growth buckets perfectly. However, the Income bucket seems to confuse me a little bit. Is it the money I will need for each of the future years 3,4,5,6, and 7 or is it an amount that is equal to anywhere from 3 to 7 years of time? It seems that is the former, but in the video you said "money that I will need in the next 3 to 7 years".
And the graphic says "3-7 years worth of expenses" which sounds like the latter.
I started out with nothing and I have plenty of it left.
🤣🤣🤣
haha!
You’re joking but having less means debt.
So did I but I managed to double it…
😂😂😂😂
love your videos!
Thank you!! 😊
I'd love to see a how to withdraw money in retirement.. Do you take all the money for each year in January or throughout the year? What happens if the market is up or down? Do you use a 1-2 year emergency fund if the market is down? Thanks for the great content!
I was literally just thinking the same thing! Say if I retire at 55, do I take a years worth of salary from a 401 all in January, or space it out over several months or the year?! 🤷♂️
@@brandon8531I retired at 59.5 yrs and had a set sum withdrawn monthly until age 62. I was afraid a lump sum yearly might be to tempting and end up spending it all before the year was up. This money was from a 457 account and at 62 I still had my 401k plus savings. I also had 2 pensions to add to the 457 withdrawals.
At times I feel I overthink these concepts. It’s great to have a plan.. but losing sleep over it is giving me migraine.
You have failed to mention since 1900 there have been several time periods when the US stock market traded in a sideways range for 10+ years.