Retirement Bucket Strategy – Segment Cash, Bonds, and Stocks for RMDs

A retirement “bucket strategy” divides your portfolio into time‑segmented sleeves—cash, bonds, and equities—so you can fund withdrawals predictably while managing sequence‑of‑returns risk. Pairing buckets with your Required Minimum Distributions (RMDs) creates a simple annual routine: take the RMD, refill near‑term buckets after good markets, and pause refills after bad markets.

This guide explains how to size each bucket, how to source RMDs intelligently, and how to maintain guardrails that adapt to market conditions.

Why buckets pair well with RMDs

• Reduce sequence risk: Drawing from cash/bonds during down markets lets equities recover
• Make sourcing simple: Use the RMD and interest/dividends to keep cash full first
• Add guardrails: Rules determine when to refill from equities or hold steady

Buckets don’t guarantee higher returns, but they can improve retirement “sleep quality” by separating near‑term spending from long‑term growth assets.

The classic 3‑bucket layout

• Bucket 1 (Cash): 12–24 months of planned withdrawals
• Bucket 2 (Bonds): the next 3–7 years of withdrawals
• Bucket 3 (Equities): long‑term growth to outpace inflation

Think of Bucket 1 as your paycheck replacement, Bucket 2 as your stability sleeve, and Bucket 3 as your engine for long‑term real return.

Sizing the buckets

1. Estimate annual spending and identify non‑portfolio income (pension, Social Security)
2. Determine the annual “portfolio withdrawal need” (spending minus income)
3. Size Bucket 1 at 12–24 months of that withdrawal need
4. Size Bucket 2 to cover the following 3–7 years (laddered bonds or short/intermediate Treasuries)
5. Put the remainder in Bucket 3 (diversified equities)

Example: If you need $96,000 per year from the portfolio, Bucket 1 might hold $96,000–$192,000. Bucket 2 might hold 3–5 years of high‑quality bonds. Bucket 3 holds equities for growth.

Refill rules and guardrails

• After good equity years: harvest gains from Bucket 3 to refill Bucket 1 (and if needed, Bucket 2)
• After poor equity years: pause refills; spend from Buckets 1 and 2 while equities recover
• Annual review: right after you take your RMD is a great time to rebalance and refill

Guardrails you can adapt:

• Equity “trim” threshold (e.g., if equities rise 10–15%+ from last refill, harvest gains)
• Cash floor (never let Bucket 1 fall below 12 months of withdrawals)
• Bond ladder maturity schedule (naturally refills cash as rungs mature)

Coordinating buckets with RMDs

RMDs are taxable distributions from pre‑tax accounts. Integrate them into your refill logic:

• First, satisfy the RMD from pre‑tax accounts (IRA/401(k))
• Use the RMD cash to top up Bucket 1
• If cash is full, consider directing part of the RMD into Bucket 2 (taxable bond sleeve) and using qualified dividends from equities for living expenses
• If charitably inclined, a Qualified Charitable Distribution (QCD) can satisfy RMDs while keeping income out of AGI

Related RMD resources:

• RMD Distribution Table
• RMD Factor Table
• RMD Withholding vs. Estimated Taxes

Withdrawing during down markets

In a bear market year, you might:

1. Take your RMD from pre‑tax accounts (required)
2. Cover the rest of your spending from Bucket 1 and maturing bonds in Bucket 2
3. Skip equity harvesting and avoid selling stocks at depressed prices
4. Refill Bucket 1 the next time equities recover above your trim threshold

This flexible discipline can reduce regret and keep you invested for the recovery.

An implementation checklist

• Define annual spending, non‑portfolio income, and the gap to be funded
• Size buckets to your comfort level (12–24 months cash; 3–7 years bonds)
• Choose instruments: HYSA/treasury bills for cash; short/intermediate Treasuries or ladders for bonds; broad‑market equity index funds for growth
• Set quarterly “check‑ins” and an annual post‑RMD “refill day”
• Document guardrails (cash floor, equity trim threshold, bond ladder schedule)

Case study: Elaine and the two‑year cash floor

Elaine, 72, needs $8,000/month from her portfolio. She maintains 24 months ($192,000) in Bucket 1, $400,000 in a 5‑year Treasury ladder, and the rest in a 60/40 global equity allocation. In up years, she trims equities to refill cash. In down years, she spends cash and lets bond maturities refill cash. She takes RMDs from her IRA in December and uses withholding to hit tax safe‑harbor targets, then finalizes the year’s refill.

Results: Fewer equity sales during declines, smoother cash flow, and a consistent annual routine.

See related: RMD Withholding vs. Estimated Taxes

Taxes, location, and account sourcing

• Tax location: Hold bonds in tax‑advantaged accounts when possible; keep tax‑efficient equity index funds in taxable accounts
• Account sourcing: Prioritize RMDs from pre‑tax accounts; consider Roth conversions in pre‑RMD years to reduce future RMDs
• QCDs: If you donate, use QCDs to satisfy RMDs and reduce AGI

Common pitfalls and how to avoid them

• Too little cash: A 3–6 month cash buffer can force equity sales during drawdowns; prefer 12–24 months
• No bond ladder plan: Random maturities can cause refilling gaps; ladder rungs to align with annual needs
• Never refilling: Forgetting to refill after strong rallies lets cash/bonds deplete and raises stress

FAQs

Is a bucket strategy better than the 4% rule?

They address different problems. The 4% rule is a starting point for a sustainable rate; buckets focus on cash‑flow mechanics and behavior during volatility. Many retirees use both: a target rate plus buckets for execution.

Can I combine buckets with guardrails spending rules?

Yes. Guardrails adjust spending based on portfolio performance. Buckets help you implement withdrawals more comfortably.

What belongs in Bucket 2?

High‑quality bonds or Treasuries, laddered to mature each year. Keep credit and duration risks moderate to ensure stability.

Related guides (with working links)

• RMD Withdrawal Timing — Monthly vs. Annual
• RMD Tax & Withholding Strategies
• RMD Factor Table

Related keywords we cover

• retirement bucket strategy calculator, cash bucket 24 months
• bond ladder for rmd, guardrails method
• cash/bond sleeve sourcing for rmd