Hong Life CalculatorsUnderstanding the retirement bucket strategy calculator — concept and principle
The bucket strategy divides a retirement portfolio by when the money will be spent: near-term spending in cash, the next several years in bonds, and the rest in stocks for long-term growth. This calculator sizes each bucket from your total portfolio, annual spending and the number of years you want in cash and bonds, and shows the resulting stock share and withdrawal rate.
How it is calculated
- Bucket 1 (cash) = annual spending × cash years.
- Bucket 2 (bonds) = annual spending × bond years.
- Bucket 3 (stocks) = total portfolio − bucket 1 − bucket 2 (not below zero).
- Stock share = bucket 3 ÷ total; withdrawal rate = annual spending ÷ total.
Bucket sizes are in today's money and ignore returns inside the buckets.
The principle
Spending in the next few years should not depend on the stock market, which can fall sharply in any single year. By holding those years in cash and bonds, you can leave stocks untouched during a downturn and give them time to recover. In good years, gains from the stock bucket refill the cash and bond buckets. Financially, the buckets are simply a way to set an overall asset allocation; the total mix of stocks, bonds and cash is what drives risk and return. The main benefit is behavioural: a visible cash reserve makes it easier to stay invested.
Worked example
Default inputs: portfolio $1,000,000, spending $45,000 a year, 2 cash years, 8 bond years.
- Bucket 1: 45,000 × 2 = $90,000.
- Bucket 2: 45,000 × 8 = $360,000.
- Bucket 3: 1,000,000 − 90,000 − 360,000 = $550,000.
- Stock share: 55%; withdrawal rate: 45,000 ÷ 1,000,000 = 4.5%.
How to read the result
More cash and bond years mean a smoother ride but a lower stock share and lower expected long-term growth. A withdrawal rate around 4% has historically been considered sustainable for about 30 years with a balanced portfolio, while rates well above that increase the risk of running short. If bucket 3 is small or zero, spending is high relative to the portfolio.
Common mistakes
- Never refilling the buckets, so the plan drifts into all stocks.
- Holding too many cash years and losing ground to inflation.
- Forgetting pension and other income that reduce spending from the portfolio.
- Believing buckets reduce risk beyond what the overall allocation implies.
Frequently asked questions
How many years of cash should I keep?
One to three years is common.
Does the bucket strategy beat a simple balanced portfolio?
Not mathematically; with the same total allocation the results are similar.
When should I refill bucket 1?
Usually after years when stocks or bonds have gained.
Sources: Evensky, H., "Wealth Management" (cash-flow reserve strategy) · Bengen, W. P., "Determining Withdrawal Rates Using Historical Data", Journal of Financial Planning (1994)