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The Hidden Pitfalls of the Bucket Strategy in Retirement Planning

The “bucket strategy” has become a popular retirement planning approach in recent years. On the surface, it’s simple and appealing: divide your retirement savings into separate “buckets” based on when you’ll need the money — a short-term bucket for immediate living expenses, a medium-term bucket for the next several years, and a long-term bucket for future growth.

The logic seems sound: keep your near-term money safe, invest the long-term portion for growth, and refill each bucket over time. Unfortunately, when we take this neat diagram off the whiteboard and into the real world, cracks begin to show. While the bucket strategy can be comforting, it often creates hidden risks and inefficiencies that can undermine your retirement security.

Let’s look at some of the most common pitfalls.

1. False Sense of Safety

The first bucket — typically cash or short-term bonds — is designed to protect you from market volatility. While it’s comforting to have several years of income set aside, cash-heavy allocations can erode purchasing power in today’s inflationary environment. Retirees may feel safe in the short term, but they’re quietly losing ground over time.

2. Inefficient Use of Capital

Money in the “safe” bucket earns very little return. This means more of your portfolio has to work harder in the other buckets to meet your lifetime income needs. Over 20–30 years of retirement, this imbalance can lead to higher withdrawal rates and increase the risk of running out of money.

3. Complicated Rebalancing in Down Markets

The bucket strategy often requires refilling the short-term bucket by selling assets from longer-term buckets. But what happens if the market is down when you need to refill? Selling growth assets at a loss to replenish cash can lock in losses and hinder recovery.

4. Overlooking Tax Efficiency

Buckets are usually described in terms of “time” but rarely in terms of “tax location.” This means withdrawals might not be optimized for taxes. Without careful planning, you could end up paying more in taxes than necessary, accelerating the depletion of your assets.

5. Behavioral Overconfidence

Many retirees adopt the bucket strategy because it “feels” like a plan — and it does reduce the psychological stress of market swings. But feelings aren’t the same as math. Without periodic stress-testing against real market scenarios, retirees may not see risks building until it’s too late.

6. Missing Opportunities for Dynamic Planning

Life changes, markets shift, and tax laws evolve. The bucket strategy is often too rigid to adapt effectively without significant restructuring. A more flexible, integrated withdrawal plan can adjust to these changes in real time.

A Better Way Forward

Buckets can be a useful mental model for some retirees, but they shouldn’t replace a truly comprehensive retirement income plan. Instead of fixed silos of money, consider a strategy that:

  • Integrates tax-efficient withdrawals across all account types.

  • Uses dynamic asset allocation that adapts to market conditions.

  • Balances growth and preservation without isolating large portions of capital.

  • Incorporates scenario testing to evaluate how your plan holds up in good and bad markets.

The Bottom Line

Retirement isn’t just about creating income for the next few years — it’s about sustaining your lifestyle for decades. The bucket strategy can be a starting point, but without a deeper, more flexible plan, you may be taking on more risk than you realize.

If you’d like to see how your retirement plan holds up under real-world conditions — and avoid the hidden pitfalls of oversimplified strategies — let’s talk. The earlier you address these risks, the more secure your retirement can be.  Call us at 256-417-4870 or 813-522-4455

 

Mike

 

About the Author: Mike Mickels is the President and Chief Compliance Officer of CochranMickels Retirement Specialists, LLC, and an avid sporting clay competitor. Our firm provides personalized planning and investment services to individuals approaching and in retirement. Disclaimer: This content is intended solely for informational purposes. CochranMickels Retirement Specialists, LLC and its representatives are only authorized to offer advisory services where properly licensed or exempt from licensure. Investing carries risks, including potential loss of principal capital. Our firm does not endorse external links, nor is it responsible for third-party content