The RB40 Bucket Strategy

You saved and invested diligently for years. Soon you’ll achieve financial independence. Now is the time to start working on your resignation TikTok video. Just don’t post it until you’re really ready to quit your job. Ok, I’m just kidding. Today, I want to talk about the Bucket Strategy. As you get close to retirement, you need to figure out how to withdraw money from your investments. The bucket strategy is one good way to do it. It balances safety with growth. Let’s see how it works and see how I adapt it for our portfolio.

What is the bucket strategy?

The bucket strategy was developed by wealth manager Harold Evensky in 1985. He wanted to protect retirees from panicking and selling at the wrong time. The bucket strategy does that by setting aside a good amount of cash reserve. Retirees can use this cash bucket to pay their expenses. When the stock market crashes, investors can hold out because they have money to pay the bills.

The OG bucket strategy is very simple. There are only two buckets.

The cash bucket – This should contain one year of living expenses. Originally, the cash bucket held two years of living expenses, but Mr. Evensky reduced it to one year after they did an academic analysis. One year is good enough. More cash in this bucket would result in too much opportunity cost.

The investment bucket – This bucket holds your investments. You’ll have to figure out the asset allocation yourself. That depends on your age, risk tolerance, and goals. Mr. Evensky holds 70% fixed income and 30% equities. He is 79 years old in 2022.

The beauty of the OG bucket strategy is its simplicity. You just hold one year of living expenses in cash and invest everything else. There is a little maintenance, though. You need to sell some investments and refill the cash bucket every quarter. The investment bucket can be as simple or as complicated as you’d like.

Asset allocation

If you need help figuring out a good asset allocation, you can try the “Investment Checkup” tool at Personal Capital. It will take your investment profile and figure out a target allocation for you. They also have financial advisors to help out if you want to talk to a real person. Sign up with Personal Capital for free and check out their tools.

More buckets

The bucket strategy caught on and became pretty popular over the years. Many financial advisors implement some version of the bucket strategy for their retiree clients. The strategy got more complicated over the years. It grew from 2 buckets to 3, 5, or even 8 buckets. I guess wealth managers need to justify their fees somehow.

Let’s look at the commonly used 3 buckets strategy that’s based on time. It is more complicated and requires more maintenance.

The short-term bucket – This is the same as the cash bucket. You can hold 1 to 5 years of cash here. Personally, I agree with Mr. Evensky. The opportunity cost is too big if you hold too much cash, especially with high inflation. With 8.5% inflation, $100,000 from last year is worth $91,500 now. That’s a big loss.   

The intermediate bucket – This bucket holds low-risk investments such as bonds, REITs, and other fixed-income assets. This bucket is supposed to capture 5-10% growth when the economy is good. It shouldn’t lose much value when the market goes down. This bucket should hold an equivalent of 5 to 10 years of living expenses.

The long-term bucket – This bucket is for long-term growth. It should keep pace with the stock market and it assumes the same risk. This bucket will fluctuate in value, but retirees won’t have to stress because they have the other two buckets to depend on. The rest of your investment should go into this long-term bucket. Ideally, it should hold 10 to 20 worth of living expenses. The good thing about this bucket is it should grow faster than inflation.

The problem with adding more buckets is the extra complication. The percentage between all the buckets will fluctuate along with the stock and bond markets. How do you rebalance between these buckets? I guess that’s why the wealth managers like this scheme. It’s job security.

Here is a DIY example from The Retirement Manifesto – How to build a retirement paycheck. His implementation looks okay. It seems really conservative to me, but that’s his personal preference.  

RB40 bucket strategy

Alright, I’ll wrap it up by sharing the RB40 bucket strategy.

The RB40 method has 3 buckets as well. Long time readers know that I’m focused on passive income here at Retire by 40. My buckets follow that ideology as well. Here is a graphic I made.

  1. The Cash bucket – This holds 1 year of living expenses.
  2. The Passive Income bucket – This bucket generate income to fund the other two buckets.
  3. The Growth bucket – This bucket is for long-term growth. I put the riskier investments here.  

The main component of this system is the #2 passive income bucket. Ideally, it should generate at least 120% of our expenses every year. We will use the 20% excess to fund the growth bucket.

The beauty of this system is that it is simple to understand and it doesn’t need a lot of maintenance. Once you set up the #2 bucket to generate enough passive income, you’re set! Well, you need to monitor the #3 growth bucket. That bucket is more volatile. It really depends on your risk tolerance. If you hate volatility and prefer to be more conservative, you can just put index funds in bucket #3. That should provide some growth.

The problem with this system is that you need to have a large amount in bucket #2. It isn’t easy to generate enough passive income to cover your cost of living. The amount is way more than the 4% rule calls for. That rule is outdated, though. These days, it would be safer to go with a 3.5% withdrawal rate or less.

WIP RB40 buckets

Here is an example of the RB40 bucket strategy. Currently, we spend less than $50,000 per year so that’s our target for the cash bucket. However, we will need to increase it soon because of inflation.

We aren’t quite there yet. This is a work in progress.

Oh, when you’re in the accumulation phase, you don’t need to keep a huge amount in the cash bucket. 2-3 months should be plenty.

All right, what do you think about the RB40 bucket strategy? Do you think it’ll work over the long haul? Let me know if you have any questions.

Passive income is the key to early retirement. These days, I’m investing in commercial properties with CrowdStreet. They have many projects across the United States. It’s been working so well that I’m planning to sell our rental condo so I can invest more. Go check them out!

Disclosure: We may receive a referral fee if you purchase or signup for a service through the links on this page.

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Joe started Retire by 40 in 2010 to figure out how to retire early. After 16 years of investing and saving, he achieved financial independence and retired at 38.

Passive income is the key to early retirement. This year, Joe is investing in commercial real estate with CrowdStreet. They have many projects across the USA so check them out!

Joe also highly recommends Personal Capital for DIY investors. They have many useful tools that will help you reach financial independence.

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25 thoughts on “The RB40 Bucket Strategy”

  1. Nice breakdown Joe, with the money you make from your blog and dividends you’re set. I’m getting there with my graphic arts business, and when I retire fully that will feed my buckets along with dividends from my investments. I’m hoping those two can cover all of my expenses.

  2. Are the WIP return figures recent actuals? Just curious at what your mid-to-long term target returns are for your buckets overall and then for your particular investments. In particular, do you plan to rely on dividends in the income bucket or is selling assets a thing if needed?

    I’m really happy about this post. I’ve read a number of articles about bucket strategies but none have clearly articulated how and when the money moves from bucket to bucket. They usually gloss over things or imply a movement from the growth bucket to the income to the cash, respectively. What you said about the income bucket feeding both the others makes sense; having enough money to generate that income also seems as if it should mitigate stock market risk.

    Good stuff! Keep it coming

  3. I’d have to call my three bucket system RD59. I was retired one month before turning 59 in a 4 p.m. meeting with HR. I just outlined my three time buckets x three tax buckets on my YouTube channel. It has worked six years now. I have three years’ of expenses in cash and equivalents (including I Bonds, short-term bonds and bills), five years’ of expenses in intermediate income producing assets (about 25 Equity/75 Fixed Income right now, and the balance in assets I hold long-term (about 80 Equity/20 long-term bonds). All dividends and income from Buckets Two and Three flow automatically to Bucket One. Then as needed, I balance the time buckets. I also balance the tax buckets with Roth conversions to move tax-deferred Bucket Three assets to Roth accounts as tax circumstances permit.

  4. I absolutely agree with having a bucket strategy in some form during retirement. From there, I think it depends on the person. Yours looks great and seems to be working great for you.

    Ours is slightly different but similar – we have about a year’s worth of cash on hand, 5 years of a short-term bond fund ladder, some REITs, and then the majority in index funds. It’s worked well for us over the past (almost) 4 years of retirement. I can see some of that changing somewhat over time though once we get past the sequence of returns risk and if we start bringing in more regular income as well.

  5. I like it. Mainly because of the income strategy. I see many in the FIRE community who turn their nose on income because of taxes. They let the tax the tail wag the dog. Income is the only thing you can really count to pay your bills without having to sell at low like this year and probably the few next to follow

  6. I love the bucket strategy.

    After 2+ years of early retirement, I’ve found that the best thing for me and my wife mentally is to hold 2 years worth of cash, rebalanced quarterly.

    We auto-pay ourselves a monthly stipend (or paycheck if you will) that flows from our cash we hold in our investment accounts into our checking account. We also still hold an “emergency fund” in our savings account just in case.

    So this way, no matter what is happening with the markets or our web business, we know that we are good to do.

    Love your approach too!

  7. Interesting strategy Joe! Ours is very different. We really don’t have a “bucket” strategy. Typically we keep 4-6 months of expenses in cash, and the rest is just investments — the best investments I can find.

    I don’t segregate them based on income levels, growth, or risk levels. In my opinion, all those factors must all be considered when making an investment.

    But that’s me! You do you!

  8. We must have the wrong index funds. Our 2nd bucket looks pretty bad this year. Way in the red. Even our much older 401ks are in the red. I know it’s only on paper and not a loss unless you sell, etc. but still very scary. Luckily our 2 houses have doubled in value in a short time and the rental income has increased. Investing is still a scary thing for a conservative, bird in the hand sort of person. I know we have too much cash on hand- I feel like I want it there in case the real estate market does crash again so we can purchase another rental or two. We did put some into short term cds as the +3% seemed better than the -15% our index fund is at this year.

  9. I enjoy the breakdown in the table the most. I have some questions though:

    (1) What stocks do you have in your dividend portfolio? Details please.
    (2) How about your 401k, 529? Are those included in the table above as well?
    (3) $500k rental property — does that include your primary home?

    • 1) Our dividend portfolio holds a big basket of dividend stocks – INTC, SBUX, LLY, TGT, LEG, ABT, ABBV, AFL, JPM, MCD, KO, WU, GIS, PG, WMT, SYY, DE, OHI, NLY, ED, UNH, UPS, CVX, SPG, DIS, DFS, HON, and POR. I buy whatever stock looks good when I have money to invest. Hold forever unless the business changes drastically.
      2) Those are included in the index funds in bucket #2.
      3) That includes 1/2 of our primary home. It’s a duplex.

  10. Your bucket strategy appears to be a thoughtfully crafted plan and clearly does work for your personal situation. Congrats!

    I have often read that the decumulation phase of FIRE is vastly more challenging than the accumulation phase of the journey. Having recently retired this year at the age of 56, we are living the transitional challenges right now ourselves. And of course, we retired right into a bear market. Lucky us! 🙂

    We will likely use a similar bucket strategy but have not fully developed a set plan yet. I do suspect that we will choose to hold more cash than you have selected as a margin of safety during a protracted bear market. There is additional piece of mind utility in doing so IMO.

    The joy of this part of the journey is that there appears to be no one right answer. It is a highly individualized question that we all must address. Your plan is as solid as any that I have seen.

    • Ouch, it’s tough to retire into a bear market.
      Check out Fritz’s bucket strategy at The Retirement Manifesto. That’s pretty good too. It’s more conservative than mine. I’m an aggressive investor now, but probably will become more conservative as I get older.

  11. You ask, “All right, what do you think about the RB40 bucket strategy? Do you think it’ll work over the long haul?”

    I think it is a great strategy. I think it will work in the long term. Looking at your assets, and your age, your wife and you have done amazing well for considerning that you quit working as an Engineer. Results don’t lie, in other words.

    As for my approach, many will critisize me for doing what I am doing. I only have a cash bucket and an income bucket. My cash bucket has around $400,000 Can. and my Income Bucket has around $1.9 million Can, all in Dividend Stocks. I don’t have a Growth Bucket at all. But I intend to publish three new books real soon that may end up making me some good money.

    Yes, I could have done better than I have done. But I believe that I have done okay given that I have worked less than half of my adult life. Between the time I was 31 and 41, I made a total of $85,000, an average of $8,500 a year, way below the poverty line for a single person. My net worth at the time was MINUS $30,000, due to student loans. From the time I was 41 to 51, my average income was $41,500 a year. This was way better than the previous ten years but still not a great income.

    These are the three principles that I live by and which have gotten me to the financial independence and freedom I enjoy today:

    1. Earn money wisely. (Don’t work hard; work smart. Only 4 or 5 hours a day is required if you have critical thinking skills, creative thinking skills, and common sense.)
    2. Save money wisely. (Save at least 50 percent of your after-tax income.)
    3. Invest money wisely. (Take calculated risks and invest in Dividend Stocks in companies that provide needs and not wants.)

    • I think your method is great. It’s all personal preference. Eventually, we’ll probably be more conservative as well. The growth bucket is good because I need something to write about.
      I love your 3 principles at the end as well. Thank you for sharing!


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