The Coronavirus Pandemic and the “Cash Bucket Strategy”


The coronavirus pandemic and corresponding market crash will likely cause the retirement “Cash Bucket Strategy” to become more popular. As Dave Ramsey often says, “cash is king.”

Earlier this year, as the COVID-19 pandemic ensued, like lots of other retirees, I watched as my retirement investments took a huge hit.

Early estimates were that millions of people in the U.S. could die from the virus. Due to (lesser) concerns about a catastrophic economic meltdown akin to the 1929 crash, there were a couple of times when I, like many others, considered bailing out of everything and going to all cash.

But I didn’t, mainly because I have built-in a buffer as part of my portfolio asset allocation, so I was not as tempted to sell down assets during times of economic stress. That buffer is what I will refer to in this article as a “cash bucket.”

During times of extreme economic turbulence, cash really is “king.”

Cash is “King,” Really?

So as not to be misunderstood, neither Dave nor I am suggesting that “cash” should be the king of our lives, something of the utmost importance to us, or anything close. We never want to make cash our king. It should never be what we give our highest allegiance to—that should be for the Lord Jesus Christ and Him alone.

The Bible is clear on this—placing our ultimate trust and allegiance in anything but Christ is idolatrous. So, when we talk about building up a cash cushion for one purpose or another, we’re on thin ice. We risk making that “cushion” a “fortress,” our source of ultimate security. The Bible warns us repeatedly that money can’t give us that.

Proverbs 18:11: A rich man’s wealth is a strong city and like a high wall in his imagination.

We are warned not to become like the rich fool in Luke 12 who built bigger barns so he could store up more and more—much more than he needed—with the fantasy that it would make his soul happy and bring him ultimate security.

Proverbs 11:28: Whoever trusts in his riches will fall, but the righteous will flourish like a green leaf.

When we say “cash is king” in the context of wise retirement stewardship, we’re saying that having a cash cushion may be better than not having one during challenging economic times. That can be cash in an emergency fund, a vacation fund, or, as we shall see, a retirement account.

Proverbs 27:12: The prudent sees danger and hides himself, but the simple go on and suffer for it.

Picking a Strategy

When I decided to retire back in 2018, I needed a plan for how to withdraw from savings to add to our Social Security benefits to cover our retirement expenses; not “just take money out of savings when needed.”

In a previous article, I reviewed several strategies for generating income (fixed withdrawals, flexible withdrawals, annuities, and so on).

I have always leaned toward some flexible (variable) withdrawal strategy. Deciding on a fixed withdrawal percentage and then only increasing it for inflation seemed too rigid to me. (Although, if you used a percentage, your actual withdrawal amount would vary based on the value of your portfolio year-over-year.)

On the other hand, the 4% “safe withdrawal rule,” which came out of a 1994 study by financial advisor and author William Bengen, says that a retiree could spend 4% of his savings in the first year of retirement, adjust that amount by the rate of inflation each year, and not run out of money for at least 30 years (and in most cases, 50 years or more).

It’s important to note that Bengen based the study on an assumption of a portfolio of 50% stocks (the S&P 500 Index) and 50% fixed income (intermediate-term treasury bills). The analysis also assumed was that the portfolio was rebalanced annually.

The basic strategy I settled on, at least for now, is the “Bucket Strategy.” In this post, I will introduce you to it. In the next, we’ll look at some weaknesses and some alternatives. In the third and final article, I’ll describe my bucket strategy and how I may change things in the future.

Hopefully, together, they will help you think through this for yourself and your family and decide what is best for your situation.

The “Bucket Strategy”

At its core, the Bucket Strategy intends to help retirees continue to pay the bills even though the financial markets tank, and without having to sell depreciated assets. This helps mitigate the dreaded “sequence of return” risk early in retirement. It also contributes to the SWAN (sleep-well-at-night) factor.

The main idea is that you think of your retirement savings (and investments) as being in three different buckets. The bucket metaphor connotes that the buckets can be filled, emptied, and refilled over time.

Bucket #1: The “Cash Bucket”

The “Cash Bucket” is just what it sounds like (except it’s not a literal bucket full of money)—it holds 1 to 3 years worth of your spending needs in cash in safe accounts such as insured checking or savings accounts, CDs, money market funds, or ultra-short-term Treasuries.

To set up this bucket, you will need to look at all your expenses for at least two years before retirement and identify what you would consider essential. Everything else becomes discretionary.

This is the bucket you draw from regularly to add to any other income sources (such as Social Security, a pension, or an annuity) to cover those essential expenses in retirement.

If the only “guaranteed” income you will have is from Social Security, it may not cover all your essential expenses. If not, you’ll need to make withdrawals from bucket one to fund the difference at a minimum. Ideally, you won’t need more than 2% to 4 per year (remember the 4 percent rule?) since it’s tough to produce more income than that from Buckets #2 and #3. Also, withdrawing more than 4 percent may put your financial future at risk.

Although you are taking cash out of this bucket regularly, you are also replenishing it. (More on that later in this article.)

Bucket #2: The “Income Bucket”

Bucket #2 is used to generate the income—through interest and dividends—to refill bucket one with minimal risk of principal and a focus on stability. Bucket #1 is “no risk / no return,” but Bucket #2 is “some risk / some return.” (And, as we will see, Bucket #3 is “more risk / potentially greater returns.”)

With its focus on capital preservation and income, the investments in Bucket #2 should be oriented toward high-quality fixed income assets (bonds, REITs, Munis, etc.), with a smaller complement of stable dividend-paying blue-chip stocks (or stock funds).

Some people use a “balanced” mutual fund (such as Vanguard’s Wellesley—VWINX, or Fidelity’s Balanced Fund—FBALX) or a dividend stock fund (such as Vanguard’s Dividend Growth Fund—VDIGX, or Fidelity’s Dividend Growth Fund—FDGFX) or similar funds for this bucket. I use a combination of dividend-paying stock and fixed-income funds.

Buckets #1 and #2 build a buffer against stock market volatility and sequence of returns risk. Depending on how risk-averse you are, you may want to shoot for covering up to ten years of expenses between the cash in Bucket #1 and the bonds and high-quality stocks in Bucket #2. In that scenario, if Bucket #1 contains 2 to 3 years of expenses, Bucket #2 would hold at least 7 to 8 years of spending.

You may have noticed that this looks a lot like a balanced portfolio of stocks, bonds, and cash. If Bucket #2 is two-thirds bonds and one-third dividend-paying stocks, and Bucket #3 is growth stocks (or perhaps dividend growth stocks), your allocation would be 56 percent stocks and 44 percent bonds and cash. It would become more conservative if you add more cash to Bucket #1 or up your bond allocation in Bucket #2.

Bucket #3: The “Growth Bucket”

This is your growth bucket. It has the longest time frame, so you shouldn’t plan to tap the money for at least eight to ten years.

Because the focus is on long-term growth—to offset inflation and provide the additional funds that will be needed in the future—it would be invested mostly in stocks.

Yes, there is more risk in Bucket #3, but only stocks have demonstrated the ability to beat inflation over long periods consistently. Furthermore, your investments are diversified across the three buckets.

You can take moderate- to high-risk in Bucket #3. Since you are mainly looking for growth, growth-oriented stocks are in view. You can invest in individual stocks or growth-oriented mutual funds such as the Vanguard Total Stock Market Index Fund (VTSAX) or the Fidelity Total Market Index (FSKAX). Morningstar has some excellent model portfolios that use the bucketing approach.

Because of the heavy allocation to stocks, this bucket will be more volatile than the others. You shouldn’t be too concerned since you won’t need the money for ten or more years. You can sleep well during a prolonged bear market, knowing that it will most likely recover before you have to tap into it. This will help you not panic and sell during a major market downturn or prolonged bear market, which turns your “paper losses” into real ones.

How To Implement The Bucket Strategy

As I stated at the start, if you have a 60/40 balanced portfolio with a cash component, you already have the basics in place for implementing this strategy. Let’s look at some more of the mechanics of setting up and managing the Bucket Strategy.

Filling Your “Cash Bucket” #1

To get started, you may have to shift some assets to a “cash bucket” account within your IRA or 401(k) if you don’t already have one. (Most brokerage accounts already have a “default” cash account.)

You will also need a transactional account—a checking or savings account (with check-writing privileges). Most people will use one outside their retirement account. This account should be liquid and very low or no risk.

I use Fidelity for my self-directed IRA, and my cash bucket is about two years’ worth of withdrawals in an FDIC-insured savings sub-account. I do monthly transfers from it to my Fidelity Cash Management Account with checking, and bill-pay—a correspondent bank manages it on behalf of Fidelity.

For example, if you have a portfolio of $500,000 and have determined that you need to withdraw $20,000 a year (4 percent) from your savings to supplement Social Security, a pension, or annuity, a reasonable target for Bucket #1 would be $40,000 to $60,000. In that case, depending on how you handle checking and bill-pay, you would need to set up an automatic monthly or bi-weekly transfer from the cash bucket to your checking or savings account.

Filling Your “Income Bucket” #2

As we have seen, the main goal of Bucket #2 is generating income to refill Bucket #1 using relatively stable, income-producing assets. For most, including yours truly, this means dividend-paying-stock and -bond funds. There is some market risk and interest-rate risk, but you are looking for investments at the lower end of the risk spectrum. In addition to dividends and interest, you are also shooting for some capital growth.

Because I am very conservative, with a 35% stocks / 65% bonds and cash portfolio allocation, my Bucket #2 is mostly bonds. As I wrote in a previous article, I am looking for ways to boost the interest income from this part of my portfolio during extremely low interest rates.

Returning to our $500,000 example portfolio, if you fill Bucket #2 with about 10 years of spending, it would contain $200,000 ($20,000 x 10 = $200,000).

In my situation, Buckets #1 and #2 contain about 15 years’ worth of spending, which is on the ultra-conservative side. I may need to shift some of that money to slightly more aggressive investments such as stocks, real estate (REITs), or higher-yielding fixed-income assets.

Filling Your “Long Term Growth Bucket” #3

Bucket #3 is targeted at long term growth and should be filled with money you won’t need for at least 10 to 15 years. Since we have covered a total of 13 years of spending in Buckets #1 and #2, Bucket #3 would hold the rest. This would be about $240,000 ($500,000 – ($60,000 + $200,000)) = $240,000.

Due to the growth orientation, the majority of people, myself included, will populate this bucket with mostly stocks or stock funds, both domestic and international. I lean toward dividend growth ETFs, such as iShares Core Dividend Growth (DGRO) and Vanguard’s Dividend Appreciation Fund (VIG). I like funds like these because they pay dividends and also offer the opportunity for capital appreciation. Others may want to be more aggressive and include more things like mid-caps and small-caps and emerging market funds.

This bucket will be the most volatile since it’s tied to the stock market’s ups and downs. But the good thing about the bucket strategy is that you can “let it ride,” knowing that you won’t need it until some time in the future. In other words, it may help you not to panic during a market downturn or extended bear market, permanently booking losses and putting the brakes on future growth.

Refilling Buckets #1 and #2

Ideally, Bucket #1 can be refilled with dividends and interest from Buckets #2 and #3.

But there is a potential problem. To illustrate, if Bucket #2 and #3 contain $440,000 and generate 3% in interest and dividends (which can be challenging to do right now), you will be refilling Bucket #1 with only $13,200 per year. That leaves an annual deficit of $6,800. Where will that money come from?

Instead of only interest and dividends, you may need to use a “total return” approach (interest plus dividends plus capital gains). If the total return for Buckets #2 and #3 averages 4% a year, you could theoretically generate an annual income of $17,600 ($440,00 x .04 = $17,600). Although that’s still not the $20,000 needed, the gap has been closed significantly. If you can get by on a little less, or if total returns are higher, you’d be in pretty good shape.

A simple way to implement the total return approach is to reinvest interest and dividends instead of depositing them directly in a cash account. You would then periodically sell stocks if they are up; or sell bonds if they are up, but stocks are down. By doing this, you are rebalancing your asset allocation to maximize your total return over time. How often you do this is up to you, but it may be counterproductive to do it more than 2 or 3 times a year.

During times of strong market performance (it can be up 10, 20, or even 30 percent during some years), you could incrementally sell assets from Bucket 3 to refill Buckets #1 and #2, effectively locking in those gains for future use.

If both are down (which can happen), you will have to continue to withdraw from Bucket #1 and only refill it with dividends and interest. But that may not be enough to keep your cash bucket filled.

Good For Some, But Not All

The bucket strategy will work for many retirees, but it has some weaknesses, as I have mentioned a couple of times. I will further discuss these challenges and ways to address them in the next article: “The Cash Bucket: Issues and Alternatives.”


👋 Hi, I’m Chris Cagle, the founder of Retirement Stewardship, a blog that focuses on the various aspects of retirement from a Christian stewardship perspective (1 Peter 4:10).

I write as a retiree who is dealing with the things I write about. I base most of the articles on my research and experience applying it to my situation and how it might apply to yours.

If you’re new here, check out the site introduction for an overview. You can also learn more about me.


My Books

Redeeming Retirement: A Practical Guide to Catch Up (2021)
The Minister’s Retirement (2020)
Reimagine Retirement: Planning and Living for the Glory of God (2019)