The 3 bucket strategy is one of the most effective ways to structure a retirement portfolio. It gives retirees confidence that their income is secure, even in turbulent markets. Instead of guessing how to invest or when to withdraw, this approach divides your money by time horizon and provides a clear, flexible withdrawal plan.
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Bucket One: Short-Term Needs
- Covers the first two years of retirement spending
- Held in cash or high-interest savings for stability and liquidity
Bucket Two: Medium-Term Needs
- Covers years 3 to 8 of retirement
- Invested in conservative assets like GICs, bonds, or low-volatility alternatives
Bucket Three: Long-Term Growth
- Money you won’t need for 9 years or more
- Invested in equities or other growth-oriented assets to outpace inflation
How the 3 Bucket Strategy Works in Practice
Let’s say you retire with $1 million and need $40,000 per year from your portfolio. After setting up the three buckets, here’s what it looks like:
- Bucket One holds $80,000 (2 years of income)
- Bucket Two holds $240,000 (6 years of income)
- Bucket Three holds the remaining $680,000 for long-term growth
Each year, income is drawn from Bucket One. At year-end, you refill Bucket One using funds from Bucket Two. If markets perform well, Bucket Two is replenished from Bucket Three. However, if markets are down, Bucket Three is left untouched to allow for recovery. This process minimizes the risk of selling investments at a loss.
Why the 3 Bucket Strategy Works
This strategy offers:
- Predictable short-term income
- Reduced risk from market downturns
- Long-term growth potential
Additionally, it reduces the emotional stress many retirees feel when markets are volatile. Instead of worrying, you have the peace of mind that your income for the next several years is protected.
Real-Life Case: Using the 3 Bucket Strategy in Sharon’s Retirement
Sharon is 67, single, and recently retired. She wants to spend $4,500 per month in retirement, increasing with inflation.
Her retirement income includes:
- $1,000 per month from CPP
- $713 per month from Old Age Security
- $120,000 in a TFSA
- $900,000 in an RRSP
To fund her retirement, we built a plan using the three bucket strategy. We decided to draw from her RRSP first, which helps reduce the eventual tax burden on her estate. Her TFSA, meanwhile, continues to grow tax-free.
To meet her first year’s income need of $54,000 (after factoring in government benefits), she withdraws just over $44,000 from her RRSP. The next year, she needs $55,000 due to inflation, so she withdraws about $47,000.
We structured her RRSP into three buckets:
- Bucket One: Roughly $9,000 in a savings account for immediate income
- Bucket Two: Six years of withdrawals held in conservative investments
- Bucket Three: Remaining RRSP assets invested for long-term growth
Her TFSA was placed entirely in Bucket Three to take advantage of tax-free compounding for the next decade or more.
Final Thoughts
The 3 bucket strategy brings structure and flexibility to your retirement plan. It ensures you have money to spend when you need it, while still allowing the rest of your portfolio to grow.
