InvestingNov 13, 2026
The Bucket Strategy: How Many Years of Cash You Need in Retirement
Key takeaways Buckets organize your withdrawals, but your withdrawal rate still decides how long the money lasts. Size every bucket from what your portfolio has to supply each year, after subtracting Social Security, pensions, and other certain income. A bond bucket covering roughly years three through 10 lets you leave stocks alone through most downturns. Refill cash from income and rebalancing gains first, and avoid selling assets that have just fallen. For most of your working life, a bad stretch in the stock market is something you can wait out. Your paycheck keeps arriving, your 401(k) contributions keep buying shares at lower prices, and you don’t have to sell any assets to pay your monthly bills. Retirement changes that arrangement because the paycheck stops, and the portfolio you spent decades building becomes the thing that pays for groceries, property taxes, and everything else in your life. That shift raises a practical question that arrives with the first withdrawal. When the market drops, where does next month's money come from, and how do you avoid selling stocks at the worst possible moment to pay the bills ? The bucket strategy is an approach that has been widely referred to across the financial planning industry (1) that divides your savings by when you'll need the money, keeping the next few years of spending in safe, easy-to-reach places and leaving long-term money invested for growth. This guide explains what the research says about how much cash helps and how much starts to hurt, how to size each bucket in dollars, and how to refill the buckets without undoing the protection they were set up to provide. The problem the bucket strategy is trying to solve. When you're withdrawing from a portfolio every year, the order of your returns carries a lot of weight . Morningstar is a leading independent financial research firm best known for its objective data and 1-to-5 star ratings that help investors evaluate mutual funds, ETFs, and stocks, and their retirement income research found that people who hit poor returns in their first five years of retirement and didn't cut their spending were much more likely to exhaust their savings than those whose first five years brought positive returns. The same research puts the highest safe starting withdrawal rate at 3.9% for someone who wants steady inflation-adjusted spending over 30 years with a 90% chance of money left at the end, assuming a portfolio with 30% to 50% in stocks (2) . The bucket strategy tackles that early-years risk from a different direction. Rather than changing how much you withdraw, it changes where the withdrawals come from. Morningstar's bucket framework describes its core as a highly liquid holding meant to cover near-term living expenses for one year or more, with bonds and stocks behind it. The cash and bond layers exist so you don't have to sell from the stock bucket when it's in a slump, which would turn paper losses into real losses (3) . A 2023 Morningstar research paper comparing several bucket designs concluded that their primary benefits are behavioral and that they're best suited to investors who are likely to overreact to market volatility (1) . That's a useful lens for the rest of this article. A bucket plan is a structure for keeping your nerve despite market conditions, and how well it works depends heavily on how much cash you hold and how you refill it. How do you figure out what each bucket needs to hold? Every bucket calculation starts with the same number, which is how much your portfolio needs to supply each year. That's different from what you spend. Morningstar's framework tells you to start with your annual spending and subtract any certain income from outside the portfolio, such as Social Security or pension payments (3) . Whatever is left is the amount your savings has to produce, and that figure is the yardstick for sizing every bucket. Here's a hypothetical household to make it concrete. A retired couple spends $90,000 a year. Between two Social Security benefits and a small pension, $40,000 arrives every year without touching their investments. That leaves $50,000 a year for the portfolio to cover, and it's the $50,000 figure, not the $90,000, that determines how big each bucket should be. Their portfolio totals $1.2 million. Bucket 1: The cash bucket. Morningstar's framework calls for at least one year of portfolio withdrawals in highly liquid assets and suggests that more conservative investors double that figure (3) . In a separate walkthrough of how she sets allocations, Christine Benz, Morningstar's director of personal finance and retirement planning , earmarks two years' worth of spending needs for cash (4) . For the hypothetical couple example above, that means $100,000. $50,000 in cash in year one, and another $50,000 for year two. If you keep an emergency fund for surprises like car repairs or a larger-than-expected medical bill, it belongs inside this bucket as an addition to the withdrawal reserve, not as a substitute for it (3, 4) . A couple holding $100,000 for two years of withdrawals and $20,000 for emergencies would keep $120,000 in this layer. Bucket 2: The bond bucket. The second bucket covers the years after the cash runs out. In Morningstar's primary framework, it holds five to eight years of living expenses and is dominated by high-quality fixed-income exposure, with room for a small share of high-quality dividend-paying stocks (3) . Benz's allocation walkthrough frames the same idea by time, setting aside money for spending in years three through 10 of retirement in bonds (4) . Using the years-three-through-10 version, the hypothetical couple would place eight years of withdrawals, or $400,000, in Bucket 2. Bucket 3: The growth bucket. Everything else goes into growth assets. Morningstar's framework describes this bucket as dominated by stocks and more volatile bond types such as junk bonds, and as the portion likely to deliver the best long-term performance (3) . The reasoning ties back to time. Benz notes that stocks are unreliable over periods shorter than 10 years but typically land in positive territory for investors who can hold on for at least a decade, which is why money not needed for 10 years or more belongs here (4) . For the couple, that leaves $700,000 in Bucket 3. It's worth checking that withdrawal against the research on safe spending. A $50,000 withdrawal from $1.2 million is about 4.2% in the first year, a bit above the 3.9% base case Morningstar calculated for a 30-year retirement. The same research found that older retirees with shorter horizons can reasonably spend above 3.9%, and that people willing to let their spending move with the market can start with a withdrawal rate of nearly 6% (2) . Buckets don't change those odds by themselves. They organize the withdrawals, but the withdrawal rate still decides how long the money lasts. Is holding more cash always safer? This is where the research pushes back on intuition. Holding several years of spending in cash feels like the cautious choice, but Benz points out that there's an opportunity cost to holding too much in cash (4) , because every extra dollar parked there is a dollar not invested for growth over a retirement that can last decades. The most thorough test of this question comes from Javier Estrada of IESE Business School, who examined bucket strategies using annual stock and Treasury bill returns for 21 countries from 1900 to 2014. He found that the best-performing fixed-allocation portfolios, those with 50% to 70% in stocks , clearly outperformed the best bucket strategies. He also found that setting aside five years of withdrawals in cash caused the failure rate (meaning the share of retirements that ran out of money) to rise dramatically from under 10% to over 25% (5) . Estrada's explanation is that bucket strategies that keep a fixed number of years in cash avoid selling assets that have fallen, but they also hold back from buying more of those assets while prices are low. He concluded that the behavioral bias of mental accounting comes at a cost in performance (5) . Morningstar's guidance of one to two years of cash sits well short of the five-year reserve that raised failure rates sharply in Estrada's research (3, 5) . You can put a rough price on that tradeoff. Suppose, hypothetically, that the couple's cash earns two percentage points a year less than their bond and stock mix. Moving from one year of cash ($50,000) to two years ($100,000) would cost them about $1,000 a year in forgone return on the extra $50,000. Moving to 5 years ($250,000) would cost about $4,000 a year on the extra $200,000, every year, whether or not the market ever falls. Whether a second year of cash is worth $1,000 a year to you is a personal call. Where should the cash and bond money live? Once you know how much goes in each bucket, the next decision is which accounts and products hold it. The choices for Bucket 1 differ more than they look on a statement: Bank deposits are the simplest. The Federal Deposit Insurance Corporation (FDIC) covers checking accounts, savings accounts, money market deposit accounts, and certificates of deposit (CDs) at insured banks, up to $250,000 per depositor, per insured bank, for each account ownership category. FDIC insurance doesn't cover stocks, bonds, mutual funds, annuities, or Treasury securities, even when you buy them through an FDIC-insured bank (6) . Money market funds are a different product from money market deposit accounts, despite the similar name. The Securities and Exchange Commission (SEC) explains that money invested in a money market fund isn't guaranteed by the FDIC the way bank accounts are, so there's a risk you could lose money. Many of these funds aim to hold their value at $1.00 per share, and the SEC notes that they very rarely fall below it (7) . Treasury bills are short-term government securities that mature in anywhere from a few days to 52 weeks, and they carry the full faith and credit of the U.S. government (8) . For Bucket 2, the main thing to understand about bonds is how they respond to interest rates. If you hold a bond to maturity, you receive its face value plus interest, but if you sell before maturity, the bond may be worth more or less than its face value. When rates rise, newer bonds pay more, so selling an older, lower-rate bond may mean accepting a discount (8) . Morningstar's framework also suggests that investors worried about the cost of holding a lot of cash consider a two-part pool, with one year of expenses in true cash and one or more years in a slightly higher-yielding holding such as a short-term bond fund (3) . How do you refill the buckets as you spend? A bucket plan isn't something you set up once and leave alone. As you spend down Bucket 1, it needs to be topped up from the other buckets, and how you decide when and where to pull from is what separates a plan that protects you from one that just shuffles money around. That third step does a lot of the work in good years. Because the stock bucket is likely to grow fastest, the framework notes that it will need periodic trimming to keep the overall portfolio from becoming too heavy in stocks (3) . In a strong year, you sell some of the winners and send the proceeds to cash. In a weak year, you skip that step and let the bonds and income carry the load. There's no single right time to rebalance. The SEC's guidance on rebalancing notes that some experts recommend rebalancing on a calendar, every six or 12 months, while others recommend doing it when an asset class drifts more than a set percentage from its target, and that rebalancing tends to work best when done relatively infrequently (9) . An annual review, where you top up cash from whatever performed well and leave alone whatever fell, fits comfortably within that guidance. Here's how that might play out for the hypothetical couple above. Suppose stocks fall 20% in their first year of retirement . They spend $50,000 from Bucket 1 and leave Bucket 3 alone, so their remaining $50,000 in cash covers year two. If stocks are still down a year later, they draw on bond interest and, if needed, the safest bonds in Bucket 2 to rebuild cash. When stocks recover, rebalancing proceeds from Bucket 3 refill the cash and bond layers. At no point did they have to sell stocks after a drop to pay their bills, which is the whole point of the structure. What mistakes trip up people with bucket plans? Sizing buckets from total spending If the couple in our example had sized their cash bucket from their $90,000 in total spending, two years would have meant $180,000 in cash instead of $100,000. That extra $80,000 would sit earning less for no good reason, because Social Security and the pension already cover $40,000 a year. Morningstar's framework is explicit that certain income sources come off the top before you size anything (3, 4) . Holding too many years in cash It's tempting to think that if two years of cash is safe, five years is safer. Estrada's historical research found the opposite, with failure rates climbing from under 10% to over 25% when five years of withdrawals were held in cash (5) . Refilling on autopilot Some retirees set up buckets and then refill cash on a schedule by selling from the stock bucket, whatever the market has done. That brings back the exact risk the strategy was designed to avoid. Morningstar's sequence puts income and rebalancing gains first and leaves selling principal as the last resort (3) . Want a second set of eyes on your bucket plan? Deciding how many years of cash you need comes down to your spending, your other income, and how you'd feel watching your stock bucket fall 20% in your first year of retirement. If you'd like to pressure-test your numbers before you move money, a fee-only advisor can look at your accounts as a whole and help you set refill rules you'll stick with when markets are rough. Find an advisor by answering a few quick questions: Nothing on this site constitutes investment advice. All investors are encouraged to conduct their own research before making any investment decision. Past performance is not a guarantee of future results. Greensprout's editorial team writes on behalf of the reader. Our goal is to provide clear, useful information to help you make better financial decisions. Our editorial content is not influenced by advertiser relationships. Greensprout is an independent, advertising-supported publisher and comparison resource. We may earn compensation when you click on links to products from our partners. This does not affect our editorial standards or recommendations. All dollar figures in this article are hypothetical illustrations, not projections of any investment's performance. References 1. Cheng, Jimmy, Tao Guo, and Michael O'Leary. "A Comparative Study of Retirement-Income Bucket Strategies." Morningstar, June 2023. https://www.morningstar.com/content/cs-assets/v3/assets/blt9415ea4cc4157833/blt2da7af775da0d57e/65aacbb9c7bb160246a29912/Bucket_Strategies_Comparison_(3)_(1).pdf 2. Morningstar. "What's a Safe Retirement Withdrawal Rate for 2026?" https://www.morningstar.com/retirement/whats-safe-retirement-withdrawal-rate-2026 3. Morningstar. "The Bucket Approach to Building a Retirement Portfolio." https://www.morningstar.com/portfolios/bucket-approach-building-retirement-portfolio 4. Morningstar. "The Bucket Investor's Guide to Setting Retirement Asset Allocation." https://www.morningstar.com/personal-finance/bucket-investors-guide-setting-retirement-asset-allocation 5. Estrada, Javier. "The Bucket Approach for Retirement: A Suboptimal Behavioral Trick?" IESE Business School, May 2019. https://blog.iese.edu/jestrada/files/2019/07/BucketApproach.pdf 6. Federal Deposit Insurance Corporation. "Understanding Deposit Insurance." https://www.fdic.gov/resources/deposit-insurance/understanding-deposit-insurance 7. U.S. Securities and Exchange Commission, Investor.gov. "Investor Bulletin: Money Market Funds." https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins/updated-12 8. U.S. Securities and Exchange Commission, Investor.gov. "Bonds." https://www.investor.gov/introduction-investing/investing-basics/investment-products/bonds-or-fixed-income-products/bonds 9. U.S. Securities and Exchange Commission, Investor.gov. "Asset Allocation and Diversification." https://www.investor.gov/introduction-investing/getting-started/asset-allocation
