What Is the Bucket Strategy and Should You Use It

The Bucket Strategy was originally designed by Certified Financial Planner Harold Evensky in the 1980’s. 

His goal? Help those planning their retirement have cash to live on along with other money that’s (hopefully) earning more money via investing. 

Although Evensky’s original design consisted of just two buckets, most personal finance experts today prefer a three-bucket approach to this strategy. 

The revision into a three-bucket approach added an extra layer of security and/or growth potential to the initial strategy of Evensky’s, making it a more comfortable option for many investors. 

Here’s a breakdown of what the Bucket Strategy looks like today, at least for many investors. Use this guide to decide if the Bucket Strategy might work for you.

Table of Contents
  1. Bucket 1: 1-2 Years of Living Expenses in No-Risk Vehicles
  2. Bucket 2: Medium Term Holdings in Bonds and High Quality Stocks
  3. Bucket 3: Higher Risk Holdings for Long-Term Investing
  4. How the Bucket Strategy Works
    1. How Each Bucket Functions
    2. How Much Money Should I Put in Buckets 2 and 3?
    3. Where to Get the Money From
    4. When to Transfer Funds
  5. Pros and Cons of the Bucket Strategy
    1. Pros
    2. Cons
  6. Who Should Use the Bucket Strategy? 
  7. Summary

Bucket 1: 1-2 Years of Living Expenses in No-Risk Vehicles

Your first bucket would hold one to two years of living expenses. This cash is used to serve as sort of an emergency fund, this is the cash you will be using to pay day-to-day living expenses. 

Because of that, Bucket 1 sits in a high-yield savings account or another low-to-no risk vehicle. You want to be able to access it quickly and be able to do so without fees or penalties. 

Bucket 2: Medium Term Holdings in Bonds and High Quality Stocks

Bucket 2 will contain, depending on who you talk to, five to ten years’ worth of living expenses. This bucket’s investment choices will consist of medium risk and return investments, such as:

You’ll want to be sure this bucket earns income from a somewhat diversified portfolio design that has a long history of being trustworthy. 

Bucket 3: Higher Risk Holdings for Long-Term Investing

Bucket 3 is your “higher-risk” bucket. This bucket is used for higher-risk investing such as junk bonds, commodities, and riskier stocks. 

Expect to not touch the money in Bucket 3 for at least ten years. It has to be able to withstand market swings and have time to earn the largest return possible. 

Now that we’ve defined the premise behind the Bucket Strategy, how exactly does it work? 

How the Bucket Strategy Works

The Bucket Strategy works a bit differently for everyone, based on how many years of retirement you’ve saved for, your risk tolerance, and other factors. 

However, there are some common guidelines that apply to most all Bucket Strategy participants. 

How Each Bucket Functions

Bucket 1, as mentioned earlier, is sort of like your pre-retirement Emergency Fund, only with a bit more flexibility. 

The cash in Bucket 1 will get used primarily to make up for shortfalls in post-retirement income sources such as your Social Security and/or pension checks. 

The goal is to live on your fixed income sources, but if that’s not possible, your Bucket 1 covers the gap. 

For this reason, you’ll want to have an idea of how much money you’ll need to take out of Bucket 1 and what you need in the bucket to make it last for one to two years. 

This information is key because coming up with the right numbers in Bucket 1 helps ensure you won’t have to make premature withdrawals from the other buckets. 

Bucket 2 will be used to refill Bucket 1 as it gets low and then in turn is refilled by Bucket 3. 

Bucket 3, your long-term investment bucket, will be used to house higher-risk investments for long-term growth. 

How Much Money Should I Put in Buckets 2 and 3?

The Bucket Strategy involves putting one to three years of expenses in Bucket 1. But how much money should you put in Buckets 2 and 3?

The answer to that question depends on a couple of things. 

  1. How long do you have until retirement?
  2. How long do you need your money to last?
  3. What is your risk tolerance level? 

It’s safe to say that the majority of your retirement savings will go into Buckets 2 and 3. How you divvy up the money between the two buckets is up to you. 

For instance, if you’ve got plenty of cash to last you thirty years of retirement or more, you’re over 50, and you’re not a big risk-taker, you might want to put 75% of your remaining (after Bucket 1) funds into Bucket 2 and 25% in Bucket 3. 

However, if you’re barely 30 and okay with higher-risk investing, you may want to reverse those numbers. 

You’ll monitor each bucket like you would other investments, paying special attention to Buckets 2 and 3 so that you can make changes to the portfolios as the years roll by and as the market changes. 

Where to Get the Money From

As to how to fund your buckets, you’ll fund them starting with savings and retirement funds you already have. 

For instance, if you have more than 10 years until retirement your 401k might be re-labeled Bucket 3 as you change the investment strategy on the account and move into all higher-risk investment funds. 

Or, if you are approaching retirement, you may wish to allocate half of your 401k balance into higher-risk funds and the other half into funds focused on blue-chip stocks or quality bonds. 

You’ll do the same with other investment vehicles you own, designating them to either your Bucket 2 or Bucket 3 lists and changing your investment allocation accordingly.

Monies can be transferred to Bucket 1 as your retirement date gets close, perhaps one year or less.

If you’re still at the point in this process where you’re working on building up funds for each bucket, add into your budget whatever you can afford to save each month.

Treat the dollar amount like a bill, setting automatic transfers up for each bucket so you can rest assured the balances will continue to grow.  

When to Transfer Funds

The decision as to when to transfer funds from Bucket 3 to Bucket 2, and then to Bucket 1, is as individual as you are. 

The most common strategy for transferring funds from one bucket to another is to refill Buckets 1 and 2 when necessary.

As an example, you might create a pattern of taking from 2 and putting into 1 and then taking from 3 and putting into 2, whether due to cash shortages or a desire to move out of higher-risk investing into lower-risk investing.

As the years go by, your risk tolerance level may change. And once you start withdrawing funds out of Bucket 1 regularly, you’ll get an idea of how much cash you’ll be taking out each year. 

Or, your plan for retirement as a whole may change. You may decide that you want to retire earlier. Or later. 

All of these factors will help you get an idea of what your transfer/withdrawal strategy should be as well.  But as with choosing your bucket investment allocation percentages, your withdrawal strategy will be unique and individual to you and your personal situation. 

Next, let’s briefly go over some of the pros and cons of the Bucket Strategy. 

Pros and Cons of the Bucket Strategy

The Bucket Strategy, just like any other personal finance concept, is loved by some and hated by others. Here is a list of pros and cons that might help you decide if the strategy is right for you. 


Covers a Diverse Range of Risk

The Bucket Strategy covers a diverse range of risk. You get to choose what percentage of your assets goes into each bucket, based on your need for growth balanced with your risk tolerance level. 

Having buckets that contain low, medium, and higher-risk investment choices in the correct allocations for your needs is important both to the growth and to the protection of your wealth.

Allows for Cash Withdrawals and Portfolio Growth

As you near (and enter) retirement, having penalty-free cash available for withdrawals is important. It’s also important to have some segment of your portfolio that’s continuing to provide growth. 

The Bucket Strategy helps you cover both of those bases. Bucket 1 earns a bit of interest via a Money Market account or a high-yield savings account.

You can withdraw Bucket 1 money without penalties, while still helping to cover the inflation rate a bit with interest earned on the account. 

Buckets 2 and 3 work harder to promote portfolio growth.  

Customizable to Your Needs and Risk Tolerance Level

As mentioned earlier, the Bucket Strategy is nice because it’s especially customizable. You get to choose what percentage of your money is in each bucket. 

And you can choose to make the buckets as high or low risk as you want. Of course, having too much money in low-risk investments will stagnate portfolio growth.

And having too much money in higher-risk investments will skyrocket your portfolio’s level of risk to the point where you could end up with little or nothing for retirement. 

Instead, work to customize a strategy that ensures both safety and growth, using your risk tolerance level and your retirement timeline as guiding factors.  


Accurate Expense Numbers are a Must

One potential con of the Bucket Strategy is that you do need to have a pretty accurate number for your annual expenses to fund Bucket 1 properly. 

Underestimating your expenses means you’ve got too much money in Bucket 1; money that could and should be earning more interest. 

Overestimating your expenses could result in having to move money to Bucket 1 too early, meaning you could be withdrawing during a market downturn or paying penalties on investments for early withdrawal. 

If you are working your strategy and find that your expense estimates are off, work to make a correction early and without too much monetary loss. 

Management Can be Cumbersome

Management of the buckets is a big fear for prospective Bucket Strategy clients. And with good reason. 

If you don’t have an accurate estimate of your expenses or of your retirement timeline, you may end up spending a lot of time rebalancing and transferring funds. 

The same goes if you’ve incorrectly estimated your risk tolerance level. The key to overcoming this con is planning and education. 

Know your timeline. Have a good estimate of your post-retirement expenses so you know how much you should keep in Bucket 1. 

And manage Bucket 3 properly, taking risks that will help promote growth without going “all in” and risking your entire fortune. 

The more you educate yourself and get to know your needs and your wants, the less cumbersome management of your buckets will be. 

Who Should Use the Bucket Strategy? 

So, is the Bucket Strategy for you? Well, honestly, I believe the strategy can work well for anyone who’s willing to put in the work to customize the right strategy for their needs. 

As mentioned earlier, the Bucket Strategy is highly customizable. It’s simply a matter of having in-depth (and accurate) knowledge of your retirement income needs and of knowing how much money you need in each bucket. 

In other words, you need to design and manage your risk strategy based on your personal retirement plan. If you’re willing to put in the work to do that, the Bucket Strategy could work very well for you. 


The Bucket Strategy is just one of many options out there for successful wealth building and retirement planning. 

The strategy itself has a wealth of potential when done right. You’ve got your 1-3 years of expenses ready and available for use when needed in Bucket 1, safe from penalties or risk of loss.

Bucket 2 promotes “slow and steady wins the race” growth for continued wealth accumulation which works to help ensure you won’t run out of cash. 

And Bucket 3 acts as your higher-risk bucket, allowing you to take more investment risk with a hopeful payoff of larger gains. 

The customizability of the Bucket Strategy means it can work for all types of investors. 

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About Laurie Blank

Laurie Blank is a blogger, freelance writer, and mother of four. She’s psyched about teaching others how to manage their money in a way that aligns with their values and has been quoted in Bankrate.

She's a licensed Realtor with Edina Realty in Minneapolis, Minnesota (also licensed in Wisconsin too) and has been freelance writing for over six years.

She shares powerful insights on her blog, Great Passive Income Ideas, that will show you how you can create passive income sources of your own.

Opinions expressed here are the author's alone, not those of any bank or financial institution. This content has not been reviewed, approved or otherwise endorsed by any of these entities.

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