The Bucket Investing Strategy: It Can Be Good for Many Early Retirees, and the Rest of Us

Each of us, unless we're independently wealthy, needs a good retirement plan that outlines how much money we'll need to amass before we retire, how we'll get it, and how we'll withdraw from it in a way that makes it last

One way to apach your saving and is to use the "bucket" strategy

Here's an overview that can help you determine whether you want to use it

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What's the bucket strategy

The bucket strategy is time-based, and typically involves dividing your money into three imaginary buckets

Here's how many experts set it up: Bucket 1: Here's where you'll keep money that you expect to need to spend within the next year or two

These funds are best kept in savings accounts, short-term certificates of deposit (CDs), money market accounts, and the

Bucket 2: In this bucket, you'll invest money you expect to need in two to 10 years from now

It's your medium-term money, and it shouldn't be in stocks, as the stock market can swoon at any time and stay depressed for some years

You might invest this money in longer-term CDs or bonds

Bucket 3: Here you'll park money you don't expect to need for the next 10 years or so

There are other powerful index funds to consider as well

The thinking here is that if the market takes a dive, the money in this bucket will have time to wait for a recovery

That's how to set up a bucket strategy

It can work well for early retirees, on-time retirees, and even pre-retirees

Once your bucket strategy is set up, it will still require your attention regularly: As time goes by in retirement, bucket 1 will get depleted and will need to be refilled with funds from bucket 2, which will in turn draw from bucket 3

You might reassess and rebalance your buckets every year

If you're still working, you might still use this bucket strategy, but instead of taking money out of various buckets, you could just keep adding to them as needed, using any spare income

You may have noticed, by the way, that the bucket strategy is essentially a way of thinking and enacting asset allocation

What's so good the bucket strategy

There are many advantages of the system

For starters, it typically keeps much of your assets in stocks, which tend to grow faster over the long run than most or all alternatives

Still, the trend continues into more recent periods

The lesson here is that stocks outperform bonds over most long periods

The system also removes some emotions and brainwork out of managing your money, as it specifies how you'll invest your various buckets

It can also make you more comfortable to know that you have long-term assets growing while you're funding near-term needs

What are the downsides of the bucket strategy

Of course, few strategies are perfect

For best results, if you use this strategy, you may want to keep an eye on it

If bucket 1 or 2 is getting low and the stock market has surged, that's a great time to refill from bucket 3

If the stock market is in a slump, though, you may be selling some stocks when they're down

How should you divide your assets

Remember that this is just one of many ways to structure your early retirement or regular retirement

An alternative might be to just have one primary retirement portfolio, divided between stocks and bonds, or whatever you think is best for you

From that, you might sell as needed to keep a spending account full of enough money to last you a year or two -- perhaps selling more when the market has surged

If you've invested in income-ducing securities such as bonds or dividend-paying stocks, that income could also be used for daily living expenses

If you do the bucket strategy, you could tweak the buckets' timing, adjusting it more to your risk tolerance and expectations

For example, you might use bucket 3 for money that will be needed six years from now (taking on a little more risk) or 15 years from now (being more conservative)

Whatever retirement strategy you most believe in, be sure to plan well for your future

Aiming to set up multiple income s for retirement is also a fine idea

Selena Maranjian has no position in any of the stocks mentioned

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