How do I create my 2 Bucket Strategy For Retirement Income?
Jeremy Keil explains how to utilize the 2 bucket strategy for retirement income.
When you’re approaching retirement, one of the biggest challenges you face is figuring out how to turn your savings into income. You’ve spent decades building your portfolio, but when you stop working, the question becomes: How do I pay myself consistently without running out of money?
That’s where the two-bucket retirement income strategy comes in. It’s one of my favorite ways to simplify retirement income planning — because it’s easy to understand, practical to manage, and helps you balance both security and growth.
Let’s walk through exactly how you can build your own two-bucket strategy and make sure your income supports you for the long haul.
Why Two Buckets Instead of One Big Portfolio?
Most people head into retirement thinking of their investments as one large portfolio — maybe $2 million sitting across various accounts. When you’re younger, that makes perfect sense. You’re focused on growth, not withdrawals.
But in retirement, you start needing to use that money to pay your bills, travel, or fund hobbies. That’s when having just “one big pot” can get stressful — especially when the market takes a dip.
The two-bucket approach solves that problem by dividing your money into:
- A Short-Term Income Bucket – designed to fund your immediate spending needs for the next several years, using investments that aren’t tied to market ups and downs.
- A Long-Term Growth Bucket – designed to keep growing over time, helping you stay ahead of inflation and support your future income needs.
This structure gives you confidence that your short-term income is safe, while your long-term money can keep working for you.
Step 1: Define Your Short-Term Income Bucket
The first question to ask yourself is, “How long is my short term?”
Some people feel comfortable keeping two years of income readily available. Others prefer five. There’s no universal rule — the right time frame depends on your comfort level and how much market volatility you’re willing to tolerate.
Think of your short-term bucket as your “peace of mind” fund. If the market drops, you can still pull money from this bucket without worrying about selling stocks at a loss.
Let’s say you decide you want five years of short-term income set aside. The next step is calculating your actual cash flow needs for that period.
Step 2: Determine Your Cash Flow Needs
Start by figuring out how much income you’ll need each year to cover your expenses. Let’s say you need $100,000 a year to live comfortably.
Then, consider where that income will come from. Maybe you’re delaying Social Security for three years to maximize your benefit. That means you’ll need to withdraw the full $100,000 from your investments during those first three years.
Once your Social Security kicks in, providing $50,000 a year, you’ll only need to pull $50,000 from your investments annually.
Over your five-year period, your total short-term need would look like this:
- Year 1: $100,000
- Year 2: $100,000
- Year 3: $100,000
- Year 4: $50,000
- Year 5: $50,000
That’s a total of $400,000 — the amount you’d want in your short-term income bucket.
Step 3: Fill Your Long-Term Growth Bucket
Once your short-term bucket is set, everything else — in this example, $1.6 million of a $2 million portfolio — stays invested for long-term growth.
The question then becomes, How much risk should you take?
If you’ve been comfortable taking on 70–80% stock market exposure while building your wealth, you may not need to change much. The difference is that now, you’ve already carved out your short-term safety net. That gives you more confidence to leave your long-term money invested for growth.
Step 4: Review and Rebalance Each Year
Your two-bucket strategy isn’t something you set once and forget. Each year in retirement, your short-term and long-term needs will shift.
For instance, once you spend your first year’s worth of income, your short-term bucket will have four years left. You’ll need to refill it by projecting your next five years of income needs.
If you remember from step 2, the short term bucket needed $400,000. Once year 1 is complete, that $100,000 drops off and is replaced with year 6–which, as we remember, will need $50,000 since you’re receiving Social Security in that year. Your new total short-term need would look like this:
- Year 2: $100,000
- Year 3: $100,000
- Year 4: $50,000
- Year 5: $50,000
- Year 6: $50,000
New Total Short-term Bucket: $350,000
Over time, your income sources (like Social Security, pensions, or part-time work) may change — and so will the amount you need from your investments. Reviewing your buckets annually ensures your income plan stays aligned with your lifestyle and market conditions.
Why the Two-Bucket Strategy Can be Effective
This approach helps you do three critical things in retirement:
- Protect your income from market volatility – You’ll always have several years of income set aside in stable investments, so you don’t have to sell stocks in a downturn.
- Keep growing your wealth over time – Your long-term bucket continues to work for you, helping offset inflation.
- Simplify your decisions – Instead of reacting emotionally to market changes, you can focus on maintaining your income plan.
It’s a balanced, practical approach that gives retirees both financial stability and growth potential — the best of both worlds.
A Final Thought
The two-bucket retirement strategy isn’t about predicting the market — it’s about preparing for the inevitable ups and downs.
By separating your short-term spending from your long-term growth, you give yourself the freedom to enjoy retirement with less worry and more confidence.
About the Author:
Jeremy Keil, CFP®, CFA® is a financial advisor in Milwaukee, WI, author of the bestseller Retire Today: Create Your Retirement Master Plan in 5 Simple Steps and host of both the Retire Today Podcast and Mr. Retirement YouTube channel
Links:
- Buy Jeremy’s book – Retire Today: Create Your Retirement Master Plan in 5 Simple Steps
- Create your personalized longevity estimate at longevityillustrator.org
- Learn how to build your retirement masterplan plan at FiveStepRetirementPlan.com
- Work with my team to get more income, pay less in taxes, and avoid big retirement mistakes: KeilFP.com
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