Retirement Bucket Strategy: Implementation Guide

The bucket strategy has become one of the most popular approaches to retirement income planning. By dividing your assets based on when you'll need them, you create a buffer against market volatility while maintaining growth potential. For GTA retirees concerned about both running out of money and market crashes, buckets provide a practical framework. Here's how to implement it.

The Three-Bucket Framework

Setting Up Your Buckets

Step 1: Calculate Annual Spending Need

Determine how much you need annually from your portfolio:

• Total annual spending need
• Minus: Guaranteed income (CPP, OAS, pensions)
• Equals: Annual portfolio withdrawal needed

Step 2: Size Your Buckets

Using the example of $39,000 annual need from a $700,000 portfolio:

Step 3: Select Investments for Each Bucket

Bucket 1: Safety First

• High-interest savings account (2-4%)
• GIC ladder (1-3 year terms)
• Money market funds
• Short-term government bonds

Bucket 2: Balanced Growth

• Short to medium-term bond funds
• Balanced mutual funds or ETFs
• Dividend-focused equity funds
• REITs for income
• Preferred shares

Bucket 3: Growth Focus

• Canadian equity ETFs (e.g., XIU, VCN)
• US equity ETFs (e.g., VUN, XUS)
• International equity funds
• Individual growth stocks
• Equity real estate holdings

Managing the Bucket System

Spending from Buckets

In normal times:

1. Draw monthly or quarterly income from Bucket 1
2. As Bucket 1 depletes, refill from Bucket 2
3. In strong market years, refill Bucket 2 from Bucket 3 gains

During Market Downturns

When markets drop significantly:

1. Continue spending from Bucket 1 (this is why it exists)
2. Pause or reduce refilling from Buckets 2 and 3
3. Let growth investments recover before selling
4. If downturn extends beyond Bucket 1, tap Bucket 2 before Bucket 3

Refilling Strategies

Annual Refill

Each year, typically in January or after tax season:

1. Assess Bucket 1 balance vs. target (e.g., 2 years)
2. If below target, move funds from Bucket 2
3. If Bucket 2 is below target and markets are favorable, move from Bucket 3
4. If markets are down, consider delaying Bucket 3 withdrawals

Threshold Refill

Alternative approach using triggers:

• Refill Bucket 1 when it drops below 1 year expenses
• Refill Bucket 2 when it drops below 3 years expenses
• Only touch Bucket 3 when it's above your target allocation

Bucket Strategy Variations

Two-Bucket Simplified

• Safety bucket: 3-5 years in cash/bonds
• Growth bucket: Remaining in diversified portfolio
• Simpler to manage, fewer decisions

Four-Bucket Extended

• Bucket 1: 1 year cash
• Bucket 2: 2-3 years short-term bonds/GICs
• Bucket 3: 4-7 years balanced
• Bucket 4: 8+ years aggressive growth

Income Floor Approach

• Combine bucket strategy with guaranteed income products
• Use annuities or GICs to cover essential expenses
• Growth bucket for discretionary spending and legacy

Implementation Across Account Types

The bucket strategy is about asset allocation, not account types. Consider:

• TFSA: Consider for Bucket 1 (tax-free withdrawals for income) or Bucket 3 (tax-free growth)
• RRIF: Often best for Bucket 2 (bonds generate taxable interest anyway)
• Non-registered: Consider for Bucket 3 (Canadian dividend stocks for tax-preferred income)
• Coordination: Bucket strategy sits atop account-level decisions

Common Mistakes to Avoid

• Bucket 1 too large: Excess cash drags on returns
• Bucket 1 too small: Doesn't provide adequate protection
• Panic selling: Abandoning strategy during downturns
• Ignoring rebalancing: Buckets drift from targets
• Over-complicating: Too many buckets defeats simplicity benefit
• Forgetting inflation: Bucket amounts need to grow over time

Monitoring Your Buckets

Annual bucket review checklist:

1. Calculate current value of each bucket
2. Compare to target allocations
3. Assess spending accuracy (on track?)
4. Determine refilling needs
5. Review investment performance within buckets
6. Adjust for changes in spending needs