Bucket Investing Will Help You Serve a Mission

The bucket investing strategy is a way to organize your cash needs into different timeframes. Then invest those different timeframes into appropriate assets. As we have discussed, the closer you get to retirement, the more risky it is to continue investing like you did while working. For instance, it might create situations where you have to sell assets at inopportune times. When you sell something depressed in value to get a set amount of cash, you have to sell more shares than if it were up in value. This can impact your portfolio value negatively over time because you own fewer shares to recover in value. This also can create a tax bill that could’ve been mitigated if a plan had been implemented years before you started serving. This will lead to better long-term outcomes in your portfolio value and reduce the amount of taxes you pay. Both are excellent outcomes that can help you serve well into the future. The bucket strategy creates a framework to help you achieve that result, ensuring a hopeful and secure financial future.

There are three buckets based on the timing of when you will be using those assets.

Bucket 1 (Immediate Spending):

This bucket holds cash or highly liquid assets for near-term living expenses (usually within the next year or two). The primary goal of Bucket 1 is to stabilize the principal and cover income needs not met by other sources (such as Social Security or pensions). While cash yields are low, this bucket provides peace of mind during market downturns. To determine the amount for Bucket 1, start by estimating your annual spending needs and subtract any non-portfolio income (e.g., Social Security). More conservative investors may multiply this figure by two to determine their cash holdings.

Bucket 2 (Medium-Term Goals):

 Bucket 2 contains assets you’ll need in the next 3 to 9 years. These assets can be invested in a diversified pool of holdings, such as bonds or other income-generating investments. The goal is to achieve moderate growth while maintaining stability for medium-term expenses.

Bucket 3 (Long-Term Growth): 

This bucket is for assets you won’t need for ten years or longer. Invest these assets in a diversified portfolio of long-term holdings, such as stocks or equity funds. The cash buffer from Bucket 1 provides peace of mind during market volatility, allowing you to ride out downturns in the long-term portfolio.

This approach offers flexibility for when you need income and what is happening in the market. When you are working, the long-term growth bucket is all you need. As you are within 5-9 years of retirement you start to fill the intermediate bucket. Finally, grow 1-2 years of cash around a year or 2 of retiring. This ensures that the assets you need while you are serving your mission will be there, and large sales, larger-than-necessary tax bills, or poor investing markets won’t negatively impact your service now or in the future.

Alan B Faerber CFP® CRPC®