Bucket Strategy
Bucket strategy segments retirement portfolio into time-based buckets: short-term (cash 1-2 years), intermediate (bonds 3-7 years), and long-term (stocks 8+ years) to manage sequence of returns risk.
Exam Tip
Bucket 1 = 1-2 years cash. Bucket 2 = 3-7 years bonds. Bucket 3 = 8+ years stocks. Addresses sequence risk psychologically.
What is the Bucket Strategy?
Dividing retirement assets into time-based "buckets" to match spending needs.
Three-Bucket Approach
| Bucket | Time Horizon | Investments | Purpose |
|---|---|---|---|
| 1 | 1-2 years | Cash, money market | Immediate income |
| 2 | 3-7 years | Bonds, CDs | Refill bucket 1 |
| 3 | 8+ years | Stocks, growth | Long-term growth |
Benefits
- Psychological comfort in downturns
- Avoids selling stocks when down
- Manages sequence of returns risk
Refilling Buckets
Periodically replenish from bucket 3 to 2 to 1 during market highs.
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Related Terms
Asset Allocation
Asset allocation is an investment strategy that divides a portfolio among different asset classes (stocks, bonds, cash) based on an investor's goals, risk tolerance, and time horizon to optimize risk-adjusted returns.
Rebalancing
Rebalancing is the process of periodically adjusting a portfolio back to its target asset allocation by buying underweighted assets and selling overweighted ones. This risk management strategy can be calendar-based (e.g., quarterly or annually) or threshold-based (when allocations drift beyond set limits).
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