As financial advisors, the most common questions we hear from people approaching retirement are: "How do I transition from earning a paycheck to drawing on my retirement assets?" and "How much should I have invested in stocks; is my portfolio too aggressive?"
We use the same tool to answer both: buckets.
What Are Buckets and How Do They Work?
In retirement income planning, a bucket refers to a portion of your assets set aside for a specific purpose or time horizon. Buckets are a practical way to organize your money so you know what it's for, when you'll need it, and how it should be invested. Rather than viewing your retirement nest egg as one large pool, the bucketing strategy divides it into categories, each with a clear objective. At INT Wealth Planning, we typically use four buckets:
- Bank/Emergency Fund – for immediate cash needs
- Income – to cover near-term living expenses
- Growth – to support long-term needs and outpace inflation
- Wealth Transfer/Charitable Giving – for legacy and giving goals
Each serves a distinct role in keeping your retirement plan structured and sustainable.
How the Retirement Bucketing Strategy Works
1. Bank/Emergency Fund Bucket: Your "Fast Money"
The Bank/Emergency Fund bucket creates the groundwork for financial stability. It's your fast-access money, readily available for both expected and unexpected short-term needs. Consider this bucket your personal safety net for everything from car repairs to covering a few months of expenses if something unexpected happens.
Keep three to six months of essential living expenses in this bucket. This includes a mix of checking and savings accounts. Your local checking account is where day-to-day money flows in and out, covering things like groceries, utilities, and subscriptions. Having an easily accessible savings account acts as a buffer in case your checking account runs low.
However, for the bulk of your emergency savings, you should be using a high-yield savings account, which offers higher interest than a traditional savings account. While transfers from these accounts may take a day or two, the tradeoff is worthwhile: you'll likely earn more on idle cash. These accounts are also great for "sinking funds"—money earmarked for predictable, irregular expenses like a new car, travel, or insurance premiums.
To explore high-yield savings options, NerdWallet maintains up-to-date lists of top-performing accounts.
The goal of this bucket is simple: keep cash accessible, reduce stress, and avoid tapping into long-term investments when short-term expenses arise.
2. Income Bucket: Your Paycheck Replacement Plan
Most retirees don't stop needing income when they stop working; they just start drawing it from different sources. The Income Bucket aims to replicate the kind of paycheck you earn during your working years, providing monthly distributions in a way that preserves your long-term investments from short-term volatility.
This bucket is typically filled with assets not invested in the stock market. Instead, we use less risky income-producing investments such as:
- Bonds
- Alternative investments
These types of investments help generate a target return of 4–7% over time. More importantly, they give us a reliable place to pull cash from when the market is down, so we're not forced to sell stock holdings at a loss.
Why does that matter? Because of something called “sequence of return risk,” wherein the timing of your returns can have a major impact on how long your retirement portfolio lasts. Most retirement projections assume steady average returns over time, but in reality, the order in which you earn those returns matters. If the market performs poorly early in retirement while you're also making withdrawals, it can significantly reduce your portfolio’s ability to recover and grow over time. We’ll explore the sequence of return risk in greater detail in our next article.
3. Growth Bucket: Investing for the Long Term
The Growth Bucket is where your retirement portfolio continues to work for your future. Its primary purpose is to grow your wealth over time and help your assets outpace inflation, addressing your purchasing power remains strong in the decades ahead.
This portion of your retirement plan is generally invested in stocks and alternative investments. These assets are more volatile than those in the Income Bucket but offer greater long-term return potential. With the protection provided by the Bank and Income Buckets, you don't need to tap into your stock investments during downturns. This gives your portfolio time to recover and grow without interruption.
The key to success in this bucket is staying invested through market ups and downs. Market volatility is normal. But emotionally, watching your portfolio fluctuate is challenging, especially in retirement, when income feels less predictable. That's why having five to 10 years of spending needs covered outside the stock market is so powerful. It gives you the patience to weather downturns without making panic-driven decisions like selling low.
4. Wealth Transfer and Charitable Giving Bucket: Planning Your Legacy with Purpose
The fourth and final bucket in a well-structured retirement income strategy is the Wealth Transfer and Charitable Giving Bucket. This is money you don't anticipate needing during your lifetime—funds that are earmarked for beneficiaries or charitable causes. It's often composed of long-term investments, just like the Growth Bucket, but the focus here shifts from asset allocation to asset location and tax strategy.
Over the course of retirement, especially after the more active and expensive early years (what we sometimes call the "go-go" years), many clients find they're projected to end up with a surplus. That extra money creates opportunities to support your heirs, fund charitable goals, and maximize your legacy's impact—all while mitigating unnecessary tax burdens.
This bucket is invested for long-term growth, but what matters most is where the assets are held. In other words, it's less about what you're invested in and more about which accounts hold those investments. By being intentional about asset location, we can structure your wealth transfer in a tax-efficient way for you and the people or causes you care about most.
For example, Roth IRAs fit this bucket. These accounts grow tax-advantaged, and when your heirs inherit a Roth, they can withdraw the funds tax-free over 10 years. While the IRS does require that inherited Roth IRAs be distributed within a decade, no taxes are owed, making them a powerful tool for intergenerational wealth.
Taxable investment accounts are also commonly used in this bucket. When you pass away, the assets in these accounts receive a step-up in cost basis, which resets the value of the investment for tax purposes to the fair market value at your death. This reduces or even eliminates capital gains taxes for your beneficiaries when they sell those assets.
If you plan to give to charity, this bucket also opens up another opportunity: gifting appreciated stocks. Charities don't pay capital gains tax, and you, as the donor, can deduct the gift's fair market value without recognizing the gain. It's a tax-smart way to support causes you care about while reducing your taxable income—a true win-win.
Ultimately, the Wealth Transfer and Charitable Giving Bucket is about leaving your financial house in order—and doing so in a way that reflects your values. By aligning your tax strategy with your legacy goals, you can ensure your money continues to make a difference long after you're gone.
How Much Money Should Be in Each Bucket?
This is the next logical question as we walk through the bucket framework. Fortunately, the answer is simple: your financial plan determines the allocation. We use your projected retirement expenses to define how much should be in each bucket, and we base this on your income needs, lifestyle goals, and risk tolerance.
Let's take a look at an example. Suppose you need a baseline of $50,000 per year from your portfolio before taxes to cover your expenses and live without financial strain. In that case, we generally recommend setting aside five to 10 years of income needs in stable investments. That means keeping $250,000 to $500,000 outside the stock market. This is a guardrail that helps us determine your capacity for risk. Someone more aggressive might stay closer to the five-year mark, while someone more conservative might prefer the full 10 years. Others adjust based on market cycles. Ultimately, these considerations help us frame conversations about how much risk you can take and how much you want to take.
In this example, if you have $1.5 million in retirement assets, roughly 16-33% of your portfolio should be preserved from market volatility. But the numbers change if you need more, for example, $75,000 per year. At this point, you're looking at keeping $345,000 to $750,000 out of the stock market—or 23% to 50% of your portfolio. This is why we're always asking about your expenses in our meetings. Your projected retirement spending drives nearly every decision we make.
We've even had to recommend delaying home renovations or travel plans during tough markets when those expenses weren't accounted for beforehand. This is why having a bucket strategy grounded in your actual financial plan helps guide smarter, more confident decisions, especially when markets get unpredictable.
Here's how the buckets typically break down:
- Emergency Fund: 3–6 months of core living expenses, plus "sinking funds" for known costs coming in the next year, such as property taxes, insurance premiums, travel, healthcare, etc.
- Income Bucket: Five to 10 years of monthly distributions and known larger purchases, such as new cars, home projects, or major giving goals. We also include required minimum distributions (RMDs) here if they apply.
- Growth Bucket: Nearly everything above the Income Bucket goes here. This is where we aim for long-term growth by investing in stocks and other growth-oriented assets.
- Wealth Transfer & Charitable Giving Bucket: Money you're unlikely to spend during your lifetime. This is harder to quantify, but we often see it grow over time, especially once clients get past the high-spending early retirement years.
A Strategy That Supports Your Retirement and Your Confidence
The bucket strategy is more than just an investment framework—it’s a practical approach to managing retirement income with clarity and intention. By organizing your assets based on time horizon and purpose, you gain a structured system that supports day-to-day needs, long-term goals, and legacy plans.
But beyond simplifying your income strategy, this approach also provides a defense against one of retirement’s most underappreciated risks: the sequence of returns. When you have the right money in the right bucket, you’re less likely to be forced to sell during a market downturn, helping your portfolio recover and stay on track.
In our next article, we’ll explore exactly how the bucket strategy helps mitigate sequence of return risk, and why the timing of market returns can matter just as much as the returns themselves.
The opinions expressed in this material are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security, investment, or other financial product.
No strategy assures success or protects against loss.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
The information presented is based on sources believed to be reliable and accurate at the time of publication. This material is for educational purposes only and does not necessarily reflect the views of the author, presenter, or affiliated organizations. It should not be construed as investment, tax, legal, or other professional advice. Always consult a qualified professional regarding your specific situation before making any decisions.
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