I’m a big fan of buckets. I even go so far as to manage my income in buckets and I wrote about my obsession here. Having money in different places for different purposes is a natural budget and helps you apply discipline to your spending. It also helps lower the stress level.
As the Kiplinger article notes having buckets of money that provide your retirement income is a good way to manage the variables you face.
Living on a pension as I do I can only imagine the day to day concerns that one can face starting retirement with a pot of money and then trying to manage it, pay the bills, enjoy retirement and not run out of money when you don’t know how long the journey will last.
Most people know that investing at regular intervals means you buy more shares when the market is low and fewer when the market is high. In retirement, you’re making systematic withdrawals, which is the evil twin of dollar-cost averaging: You’re selling more shares when the market is low and fewer when it’s high. Each withdrawal exacerbates the decline when a fund falls in value and reduces the gains when the fund rises. In a severe bear market, pulling money from a tumbling fund can be catastrophic.
The bucket system is designed to keep you from doing just that. You divide your retirement money into three buckets: One is for cash that you’ll need in the next year or two, including major expenses, such as a vacation, a car or a new roof. The next is for money you’ll need in the next 10 years. The final bucket is for money you’ll need in the more distant future, either for you or your heirs. The bucket system “gives you the confidence and peace of mind to stay the course,” says Jason Smith, author of The Bucket Plan: Protecting and Growing Your Assets for a Worry-Free Retirement.