How the Bucket Strategy Works
The bucket strategy divides retirement assets into three segments. Bucket 1 (short-term, 1-2 years) holds cash and money market funds for immediate living expenses. Bucket 2 (medium-term, 3-7 years) holds bonds and stable funds to replenish Bucket 1. Bucket 3 (long-term, 8+ years) holds equities for growth. Daily expenses always come from Bucket 1, so stock market crashes do not force selling equities at depressed prices.
Defending Against Sequence Risk
The bucket strategy's primary advantage is mitigating sequence of returns risk. If stocks drop 30% right after retirement, Buckets 1 and 2 provide 5-7 years of living expenses without touching equities. This time buffer allows the stock portfolio to recover. When markets perform well, profits from Bucket 3 flow into Buckets 1 and 2 to maintain the buffer.
Implementation Tips
Pre-define rebalancing rules: annually move Bucket 3 gains to Bucket 2 when stocks are up, and refill Bucket 1 from Bucket 2 when it drops below one year of expenses. The bucket strategy is not mathematically optimal compared to a total-return approach, but its psychological benefit of knowing you will not need to sell stocks during a crash prevents the panic selling that destroys retirement portfolios.