This article is part of the Retirement Financial Life Equation (RFLE) series. It was initially published on November 27, 2020, and updated in March 2026.
I think many retirees, especially those with fewer savings, should strongly consider the “cash bucket with income floor” strategy that I discussed in my earlier article. If you have a pension or annuity income, or cash value in a permanent life insurance product, in combination with Social Security, then you already have an “income floor.”
Those with higher savings who are highly risk-averse and concerned about market volatility and the sustainability of their portfolio are also good candidates for a bucket approach.
In this article, the third in a three-part series on the “bucket strategy,” I will describe the general approach I use. It’s not perfect, and it won’t appeal to everyone. Like many retirees, I am seeking the optimal approach while learning and sharing along the way.
I originally wrote this article in November 2020, and I’ve used this strategy successfully for over five years. The approach has proven resilient through various market conditions, including the 2022 bear market and the subsequent recovery. While the core principles remain sound, I’ve updated the article to reflect current conditions—particularly the dramatically improved interest rate environment, the updated RMD rules under SECURE 2.0, and the integration of the latest research on withdrawal strategies, which I’ve covered in my recent articles on fixed and variable withdrawals.
This strategy applies mainly to those like me who have the bulk of their retirement assets in a traditional tax-deferred IRA (or 401(k), 403(b), etc.) and aren’t ready to commit to the “bucket with a floor” (i.e., with an annuity) approach—though I discuss why I’m reconsidering that position later in this article.
The example I will use is illustrative and intended to show my overall thought process and how I implemented the bucket strategy. That said, I wouldn’t want anyone to do something just because I do. You need to do what is best for your situation and should seek professional advice if needed.
Before getting into the details of the strategy, we need to discuss “RMDs.” I say that because I use RMDs to help guide my bucket strategy. Plus, everyone with a taxable retirement account will have to deal with them someday.
Required Minimum Distributions (RMDs)
When I originally wrote this article in 2020, I was 68 and approaching the then-required minimum distribution (RMD) age of 72. Now, at age 73, I’m actively managing RMDs, and the rules have changed significantly.
The SECURE 2.0 Act, which became law in December 2022, further increased RMD ages based on birth year:
- Born 1951-1959: RMDs begin at age 73
- Born 1960 or later: RMDs begin at age 75
These changes provide additional years for tax-deferred growth and give retirees more flexibility in timing withdrawals. However, they also mean that when RMDs do begin, they may be larger due to additional years of portfolio growth.
Your “Required Minimum Distribution” is the minimum amount you must withdraw and pay taxes on from your taxable retirement account each year. After the IRS lets you take a tax deduction on your contributions and grow your savings tax-deferred while you’re working, it’s their way of getting their share, a nibble at a time, when you retire.
Roth IRAs are not taxable (since contributions are after-tax) and do not require withdrawals during the owner’s lifetime. But traditional (pre-tax) IRA owners are required to withdraw and pay Federal and State taxes on a minimum amount each year beginning at their RMD age. (You can, of course, withdraw more and pay more tax.) There are also penalties for those who don’t—though under SECURE 2.0, the penalty was reduced from 50% to 25% of the amount not withdrawn (and further reduced to 10% if corrected within two years).
As someone who is now actively taking RMDs from my taxable IRA account, I can tell you that it isn’t any fun paying the taxes. However, we are instructed in the Bible to render to Caesar what is Caesar’s and to pay our taxes with gratitude (Mark 12:17). For detailed guidance on managing RMDs strategically, including the use of Qualified Charitable Distributions (QCDs) to reduce taxable RMD amounts, see my article on RMD Withdrawals, QCDs, and Tax Withholding for 2025.
Figuring out your RMD is straightforward: it’s your account balance at the end of the previous year divided by a specified distribution period from the IRS’s “Uniform Lifetime Table,” a life expectancy table. (But as we all know, no IRS table can tell us what our life expectancy will be—only God knows since he has already determined it—Job 14:5).
For example, for someone age 73 (the new RMD starting age for those born 1951-1959) with a spouse who is not at least ten years younger, the divisor is 26.5, which means they must withdraw 3.8% starting the year they turn 73 (1 ÷ 26.5 = 3.8%). Notice how this aligns nicely with Morningstar’s current recommended safe withdrawal rate of 3.9% for a 30-year retirement horizon.
There are different tables for different situations since RMDs also apply to surviving spouses who are beneficiaries. For information on RMDs and other IRA rules, see IRS Publication 590-B. To calculate RMDs, try the handy calculator on Investor.gov.
Growth and income bucket strategy
I have mentioned before that I use a “growth and income strategy” for investing my portfolio, which is well-suited to a bucket approach. In other words, I am looking for some growth (at least enough to keep up with inflation), income (preferably enough to keep bucket #1 filled), and preservation of capital (I don’t want to run out of money).
My portfolio is a mix of stocks and bonds, and as I’ve adjusted over the years, I continue to evaluate ways to generate income from my investments while managing risk appropriately.
When I wrote the original article in 2020, we were in an ultra-low interest rate environment that made income generation extremely challenging. Treasury yields were near zero, and even high-quality corporate bonds struggled to yield 2-3%. That environment has changed dramatically.
As of December 2025, interest rates had improved significantly:
- 10-year Treasury yields: ~4.1%
- Investment-grade corporate bonds: 4.5-5.5%
- High-yield bonds: 6-8%
- Money market funds: 4-5%
This improved yield environment makes the bucket strategy more effective because it’s now much easier to generate meaningful income from the safer buckets (#2 and #3) while still preserving capital. However, it’s worth noting that with higher yields come higher interest rate risk for longer-duration bonds.
If you are too conservative and put most of your money into short-term, high-quality investments, your portfolio may now return 4-5% annually (much improved from 2020’s near-zero returns). However, with wise risk management and an appropriate asset allocation, you may achieve returns in the 6-8% range or higher.
As you can see from the table below, if you only withdraw your RMD from a year-end portfolio balance (PYE Balance) of $500,000, with modest asset growth per year, your portfolio can maintain or even grow its value over time. The key is balancing withdrawals with returns.
The table assumes you start taking withdrawals at age 66 (before RMDs are required) using a voluntary RMD-style calculation based on the IRS distribution period for age 73, which I labeled the “Withdrawal Factor” (WF). It then uses the IRS-required RMD distribution periods for each year after age 73. (The IRS tables go up to age 115—optimistic, aren’t they?!)
Note: the original table has not been modified and so has been maintained for illustrative purposes. Readers should adjust for current portfolio values and return expectations.
The strategy I use appears to balance income with capital preservation and asset maintenance/growth. I can capture some market gains while still ensuring that I have enough cash or cash equivalents for regular withdrawals. My strategy, which I’ll call the “Wise Retirement Stewardship Strategy (WRSS),” aims to balance safety and capital preservation with sustainable long-term returns.
I have now been using this strategy for over five years, and despite periods of significant market volatility (including the 2022 bear market where stocks fell over 18% and bonds fell simultaneously), my total account balance has remained resilient and has grown over this period.
The “Wise retirement stewardship strategy” (WRSS)
There is some math involved here, so bear with me—once you read through the entire article, things will hopefully become a little less confusing.
The very first thing that I did (and that everyone who implements a bucket strategy has to do) is to figure out how much you need to withdraw from your savings each year for the next seven to ten years. Because I tend to be conservative, I used ten years. (Remember, this amount is supplemental to any Social Security, pension, annuity, or other income you will have.)
For each year, this figure will be the highest (the “max value”) of:
- Your RMD (Required Minimum Distribution), which is based on your previous year-end account balance.
- The amount of income you think you will need above and beyond other sources (pensions, annuities, Social Security, etc.). I will call this number the “Estimated Withdrawal Amount” (EWA).
I would recommend that you be conservative with the EWA calculation in #2—better to be a little “too cautious” rather than not cautious enough. Also, when calculating this number, remember to account for taxes.
Tax planning has become even more important with the passage of the One Big Beautiful Bill Act (OBBBA). For 2025, individuals age 65 and older receive:
- Standard deduction: $15,750 for singles, $31,500 for married filing jointly
- Senior bonus deduction: $6,000 per person age 65+
This means a married couple, both 65+, receives a total standard deduction of $43,500 ($31,500 + $6,000 + $6,000), which significantly reduces their taxable income. If you expect to be in the 12% tax bracket, and you need an after-tax withdrawal of $3,000/month, you would actually need to withdraw $3,410 to cover your $3,000 income requirement and the resulting $410 tax bill ($3,000 ÷ 0.88 = $3,410). However, with the enhanced standard deduction, many retirees find they’re in an even lower effective tax bracket than expected.
The next table shows the calculations for someone who retires at age 66, as I did. In my calculations, I started with a 3.5% EWA (0.035 × $500,000 = $17,500). I applied an annual inflation adjustment of 2.5% (reflecting recent inflation experience), which aligns with Morningstar’s new safe withdrawal rate guidance of 3.9% for a 30-year horizon.
Note: Original calculation table maintained for illustration
The “Max” values vary in the early years and tend to equal the RMD in years 7 through 15. That’s because I used a consistent voluntary withdrawal approach for ages 66 through 73 (before RMDs are required), and I started the EWA at a relatively conservative percentage (3.5%) and only increased it by 2.5% a year. The RMD divisors decrease (meaning percentages increase) as you age, which is why RMDs eventually exceed the EWA.
If you’d like to use a spreadsheet tailored to your situation for these calculations, you can access it in Google Drive HERE. I have included information and instructions for the tables, along with additional sheets. You will need to make a copy in your Google Drive to edit it.
The Buckets
The following graphic depicts the WRSS. As you can see, I present it as four buckets rather than two or three. I didn’t do this to overcomplicate things—I represent it this way to convey the right level of detail.
Bucket #1 – the cash bucket
The sum of the “max” value (the higher of the EWA or RMD) would be held in cash for your first two years. I use an ordinary FDIC-insured bank deposit account within my IRA for that purpose.
When I wrote this in 2020, my cash was earning a laughable 0.01% interest. Today, high-yield savings accounts and money market funds within IRAs are paying 4-5%, which is a dramatic improvement. This means your cash bucket is no longer a complete drag on returns—it’s actually contributing meaningful income while maintaining liquidity.
In our hypothetical $500,000 portfolio, the sum of the “Max” value for the first two years might be approximately $36,500. Therefore, you would hold that amount in cash (high-yield savings, money market, short-term CDs, etc.). Doing so ensures that you have enough money for withdrawals for at least the next two years. You may want to add a 10% buffer to this value for unexpected expenses.
Bucket #2 – Short-term bonds
Next, let’s look at years 3 and 4. For those years, the sum of the “Max” values are held in short-term (1-3 years) high-investment-grade bonds. That means US Treasury Bonds, AAA or AA rated corporate bonds, or the equivalent.
The short-term bond environment has improved dramatically. When I wrote this in 2020, short-term bonds were yielding 1-2%. Today, 2-3 year Treasuries yield around 4%, and high-quality corporate bonds yield 4.5-5%. This makes Bucket #2 much more attractive—you’re earning meaningful income while maintaining principal safety for near-term needs.
Since I have two years in cash, I am comfortable with a fund that contains some three-year bonds. In the example portfolio, the total investment in short-term bonds or CDs would be approximately $37,000. The improved yields mean this bucket now contributes 4-5% annually to your overall portfolio income.
Bucket #3 – intermediate-term bonds and balanced investments
This bucket contains the withdrawals for years 5 through 10 (6 years).
We have enough cash and short-term investments to cover four years, so we know we could ride out a four-year recessionary market without having to sell depreciated stocks or stock funds. So, to this bucket, we can allocate some intermediate-term bonds with a 3 to 7-year maturity. Additionally, balanced funds or high-quality dividend-paying stock funds can be used. We have the flexibility to take a little more risk, but nothing riskier than investment-grade bonds and blue-chip dividend stocks (or funds).
We want the income from this bucket to help refill buckets #1 and #2.
Intermediate-term bonds now offer much more attractive yields than in 2020:
- 5-7 year Treasuries: ~4%
- Investment-grade corporate bonds: 4.5-5.5%
- TIPS (Treasury Inflation-Protected Securities): 2% real yield + inflation adjustment
I continue to use a TIPS fund for inflation protection (with an average duration of about 7 years), along with intermediate-term domestic and international investment-grade bond funds. The improved yield environment means Bucket #3 can now realistically generate 4-5% income while maintaining relative safety.
The sum of the “Max” values for this bucket might be approximately $122,000. Our total allocated to buckets #1, #2, and #3 is roughly $195,000, which is about 39% of the initial $500,000 portfolio.
Review: what we’ve done so far
At this point, we’ve set aside enough money to handle withdrawals for the next four years and made moderately conservative, income-generating investments for the next six years, for a total of 10 years of relative “safety.” We’ve invested approximately $195,000 in cash, cash equivalents, or relatively safe bonds that should preserve capital while now earning meaningful interest (4-5% range in the current environment).
Bucket #4 – growth and higher income
The rest of our portfolio (approximately $305,000 or 61% of the total) can now be invested more aggressively for higher income and long-term growth. There are lots of ways to do this—some carry more risk than others.
My preference remains stock index funds supplemented with high-dividend and dividend-growth funds, both domestic and international. I like them because they pay dividends that can provide income in retirement and tend to be more defensive in adverse market environments. Plus, they grow over time (sometimes more than their non-dividend-paying cousins), usually at least enough to keep up with inflation.
My goal is both higher income (now realistically achievable in the 4-6% range from this bucket) and capital appreciation over the long term to keep pace with inflation. The improved income environment has made it possible to generate the income I need without taking excessive risks.
I don’t have allocations of more than 10% in any single “satellite” fund. Although some can be less risky than certain stock funds, they are not low-risk, and they add valuable diversification. Some may want to add commodities, such as gold or silver, to bucket #4. But remember, they don’t typically pay dividends and tend to be very volatile.
The selection of the various mutual funds and/or ETFs is a very individual decision. The mutual funds listed are for illustrative purposes only—they are not reflective of my exact personal portfolio. If you’re not comfortable doing it on your own, you should find a fee-only trusted financial advisor who can help.
Managing the WRSS in future years
So far, we’ve talked about withdrawals and asset allocation across the buckets. Remember, our goal is to capture market gains in up years and not sell income-producing and growth assets during down ones if we can help it. There are a couple of ways to do that.
Having now used this strategy through various market conditions, I can share some practical insights:
Option 1: income-driven refilling (my current approach)
I continually refill cash bucket #1 with interest and dividend income from buckets #2, #3, and #4. With the improved yield environment in 2025, this approach has become much more effective. Between the 4-5% yields from buckets #2 and #3 and the 4-6% combined income from bucket #4, generating sufficient cash flow to refill bucket #1 is realistic under normal market conditions without selling any growth assets.
Option 2: selective asset sales
Alternatively, you could reinvest all income from bucket #4 for faster compounding, then selectively sell appreciated assets when markets are up to replenish cash. This approach maximizes long-term growth but requires more active management and discipline.
My hybrid approach
In practice, I’ve found a hybrid works best: I let income flow to cash for regular refilling, but I’m also willing to sell appreciated positions when rebalancing is needed or when particular assets have had strong runs. This gives me the best of both worlds—steady income plus opportunistic profit-taking.
The bucket strategy pairs exceptionally well with the guardrails approach I discussed in my updated withdrawal strategies series. The 10-year safety reserve in buckets #1-3 gives you the flexibility to reduce withdrawals from bucket #4 during market downturns, which is exactly what the guardrails strategy recommends. Conversely, in strong market years, you can take more from bucket #4 to replenish the safety buckets while giving yourself a modest “raise.”
This combination allows you to potentially start with a higher withdrawal rate (say, 4.5-5% instead of 3.9%) because you have the buffer to reduce spending if needed, and you’re not forced to sell during downturns.
At this point, you may be thinking, “what about a down market that lasts 7+ years?” Such a situation is not impossible, but it’s highly unlikely. However, even if it does happen, remember that our largest bucket #4 is (hopefully) still generating income in the 4-6% range in today’s environment. Thus, at the end of 10 years, we will have been paid at least 40-60% in interest and dividends, meaning that as long as the market isn’t down more than that amount over that period, we will still break even or better.
Stay flexible
As we get older, RMDs will continue to increase. Under the new rules, those of us who started at age 73 will see our required withdrawal percentages rise gradually as the IRS divisor decreases each year. And for many, the EWA will increase as well, perhaps more than inflation. Therefore, the required ten-year “safe reserve” may grow larger over time, potentially decreasing the percentage of capital you can keep invested for growth. This may not be a significant issue for those with larger portfolios. Plus, the need for long-term growth in bucket #4 is a little less pressing each year as you age and your time horizon shortens.
The method I described, which I continue to use, is a general framework—you can customize it to your personal situation. If you have significant assets and multiple other sources of income, you may have more risk tolerance. In this case, perhaps the “safe reserve” could be reduced to 5-7 years instead of 10.
It’s important to note that you should review and potentially rebalance your buckets annually. Your year-to-year projections of withdrawals will change based on your actual portfolio balance, changes in spending needs, and inflation. In a down market, you can use cash and bonds to fund withdrawals, but be sure to replenish these “safety holdings” as soon as market conditions permit—the safety holdings are a core part of the WRSS.
In strong market years (like 2023-2024), consider taking profits from Bucket #4 to rebuild your safety buckets even beyond the minimum required levels. This gives you extra cushion for future downturns.
One possibility I mentioned in the original article—and I’m actively reconsidering in 2025—is using some of the money in cash and short-term bond funds to purchase an immediate income annuity to add to Social Security to increase our “floor” of guaranteed income. With SPIA payout rates now at approximately 8.1% for a 73-year-old (the highest in over a decade), this option has become significantly more attractive than when I wrote this in 2020.
The case for adding an annuity has strengthened considerably:
- Higher payout rates: 8.1% vs. ~5-6% in 2020
- Bucket strategy synergy: An annuity floor would allow me to be more aggressive with Bucket #4 since more of my essential expenses would be covered
- Longevity insurance: At 73, the mortality credits in an annuity become more valuable
- Simplification: Less need to manage bucket refilling if more income is guaranteed
I’ve written extensively about this decision in my annuities series and my personal analysis. The inflation concern remains (most annuities don’t adjust for inflation), but improved payout rates have narrowed the gap.