The RB40 Bucket Strategy

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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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