Bucket Strategy

The basic structure

Three buckets:

Bucket 1: Short-term (1–3 years of spending)

• Held in cash, money market, short-term Treasuries, or high-yield savings
• Used to fund current living expenses
• Essentially zero volatility

Bucket 2: Intermediate (3–8 years of spending)

• Held in balanced portfolio — bonds plus moderate stock allocation
• Rolls into Bucket 1 as time passes
• Low-to-moderate volatility

Bucket 3: Long-term (8+ years of spending)

• Held in growth-oriented portfolio — heavy stock allocation
• Refills Bucket 2 during up markets
• High volatility, high long-run expected return

How it works in practice

Year-to-year operation:

1. Spend from Bucket 1.
2. In an up market year: sell from Bucket 3 to refill Bucket 2, and from Bucket 2 to refill Bucket 1. Capture gains at peak.
3. In a down market year: don't sell from Bucket 3. Let Bucket 1 draw down, or refill from Bucket 2 only. Wait for recovery.

The key discipline: never sell Bucket 3 in a down market. The cash bucket exists precisely so you don't have to.

Why it works psychologically

The behavioral benefit is often more important than the mathematical one:

• Separates spending from portfolio swings. Your monthly expenses come from the cash bucket, which doesn't move. Seeing the equity bucket drop 30% is still unpleasant, but it's not immediately linked to your grocery budget.
• Makes "don't sell low" easy. You have cash to spend. There's no need to touch the stock position during a crash.
• Clear refill rules. In up markets, refill. In down markets, don't. No stressful "when do I rebalance?" decision.

The math vs behavior debate

Rigorous analysis (Kitces, others) has shown that bucket strategies don't meaningfully improve portfolio survival vs a straightforward rebalancing approach with the same overall allocation. The mechanics of "maintain 60/40 with annual rebalancing" produce similar long-run outcomes to "maintain 2 years cash, 4 years bonds, 14 years stocks, refill as needed."

The case for bucket strategy is behavioral:

• Retirees who use bucket strategies are more likely to stay invested through crashes.
• They tend to spend more consistently and experience less anxiety.
• They're more likely to stick to their plan.

If sticking to a plan is the binding constraint (which it often is for retirees), the behavioral advantage is real even if the math is roughly identical.

Sizing the buckets

No universal rules, but common starting points:

• Bucket 1: 12–36 months of expected withdrawals. Smaller if you have strong guaranteed income; larger if your withdrawals are the main income source.
• Bucket 2: 4–8 years of expected withdrawals. Sized to cover a typical bear market recovery period.
• Bucket 3: Everything else.

Some advisors recommend 5 years in Bucket 1/2 combined, others recommend as much as 10 years. More cash reduces sequence risk but also reduces long-run return.

Variations

Two-bucket. Some simplify to two buckets — short (cash) and long (balanced portfolio). Easier to manage.

Four+ buckets. Some add a fourth bucket for specific goals (grandkids' education, major healthcare). More complex but can be meaningful for distinct purposes.

Income-based buckets. Rather than time-based segmentation, create buckets by income source (Social Security goes to essentials bucket, pension to discretionary, etc.).

Tax coordination

Bucket strategy can be combined with tax-location optimization:

• Bucket 1 (cash): taxable account (cash doesn't need tax shelter).
• Bucket 2 (bonds): tax-advantaged accounts (bond interest is fully taxed).
• Bucket 3 (stocks): taxable account for step-up basis benefit and tax-efficient index funds; Roth for tax-free growth.

This splits allocation across account types in a way that minimizes drag.

How Horizons uses this

Horizons has a Checking Account Buffer feature that approximates the short-term bucket behavior. You designate a checking or cash account, set target bounds, and the engine flows surplus into it and deficit out of it before touching other accounts. This mimics the "spend from cash, refill from growth" discipline central to bucket strategies.