Bucket Strategy for Retirement: Three Pots of Money So You Never Sell in a Crash
7 min read
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7 min read
You are 60 and retired. You have Rp2 billion saved. Then the stock market falls 30% in a single year.
Your monthly bills do not fall with it. You still need Rp80 million this year. Where does that money come from?
If it all sits in one pot, you may have to sell stocks right after they dropped. That is the fear a bucket strategy for retirement tries to calm. This post shows how it works, with a worked example, and then tells you honestly what the research says about it.
A bucket strategy means you split your retirement money into separate pots, each with a different job.
The idea is usually credited to US financial planner Harold Evensky. Morningstar's Christine Benz made it popular. The common version has three buckets:
Think of it like a house with three water tanks. You drink from the small tank by the tap. You top it up from the middle tank. The big tank on the roof fills slowly over time.
Everything below is NetWort's own arithmetic. It is an illustration, not a forecast and not a recommended split.
How long does the cash last? Year 1 costs Rp80 million. Year 2 costs Rp82.4 million. Together that is Rp162.4 million. The Rp200 million bucket covers about two and a half years of spending (2.4 years by our math).
Those two and a half years are the whole point. It is time you can wait without selling anything else.
Now the bad year arrives. We assume stocks fall 30%. We assume bonds fall 5%, because bond prices can drop too when interest rates rise. We assume cash stays at Rp200 million. These are made-up inputs to show the shape of the problem.
| Bucket | Before the crash | After the crash |
|---|---|---|
| Cash | Rp200 million | Rp200 million |
| Bonds | Rp600 million | Rp570 million |
| Stocks | Rp1,200 million | Rp840 million |
| Total | Rp2,000 million | Rp1,610 million |
The whole pot is down 19.5%. That hurts. A bucket strategy does not remove that loss. No strategy does.
What it changes is where this year's Rp80 million comes from. It comes from the cash bucket. Cash drops to Rp120 million. You do not sell a single share at the bottom.
Here is the part that makes people nervous about one big pot.
Say you need Rp80 million and you sell stocks to get it.
That is 43% more of your stocks gone, for the same bill. Those shares are no longer there when prices recover. This is the heart of sequence of returns risk, which we explain in our sequence of returns post.
A bucket strategy says: when the stock bucket is down, do not sell from it. Spend the cash instead. Give the stocks time.
Buckets only work if the cash does not run dry. There are a few common ways to top it up:
The rule of thumb is simple: refill after good years, pause after bad ones. Our post on how often to rebalance covers the timing question.
Honest answer: the evidence is mixed, and mostly says "about the same".
We could only read summaries of the research, not the full papers, so check the originals before relying on this.
So why use buckets at all? Because the hardest part of retirement is often not the math. It is not panicking.
A retiree who can see "my next two and a half years are in cash" may stay invested through a crash. A retiree with one pot, watching it fall every day, may sell at the worst moment. The bucket view is a mental accounting trick, and it can be a useful one. It does not create extra return.
You may already own the pieces without a plan for them.
Open your Holdings view in NetWort. Look at what share of your portfolio sits in stocks, in bonds or bond-type funds, and in cash. Then ask one question: if the stocks fell 30% next month, which part would I spend from, and for how long?
If the honest answer is "I would have to sell stocks", you have just found the gap this post is about.
For the backdrop that moves bond prices and cash returns, such as interest rates and inflation, see the macro page.