04 Oct 2022

Making Cents: Deploying the ‘bucket strategy’

Making Cents: Deploying the ‘bucket strategy’

The ‘bucket strategy’ can help protect you from market crashes like we experienced in 2008/09

When people reach retirement age, and begin to take money from their pension fund, some believe all those choices about where they should invest their money ends, but it doesn’t.

The amount they’ve accumulated continues to be invested, and that poses a problem for some.

If they didn’t take much notice about where it was invested up until now, that all changes because now it could be their only source of income and they don’t want to run out of money.

But they may not have the expertise or knowledge, to know what to do with their fund. What % should go in different asset classes? What level of risk should they take? How much should they take each year? Are all questions that lead to breaking out the paracetamol.

The good news, however, is that there is a very simple strategy that I’m going to share with you, and it applies to anyone who is worried about what they need to do when they reach retirement age, and it applies to everyone regardless of how big or small their fund is, or how knowledgeable they are about pensions.

And it’s called the Bucket Strategy.

It's something I use with my clients, and for very good reason i.e. it’s simple, something they understand, and it gives them great peace of mind.

And what peace of mind is that?

It’s probably what everyone looks for when they reach retirement age i.e., a source of income that will be enough to fund their lifestyle in retirement, one they won’t outlive, one that will keep pace with inflation and protects them from market downturns.

And to help you remember, think of my name but pronounce it LIOM.

Lifestyle Inflation Outlive Market

Back to the Bucket Strategy (BS) because I think it can change how you approach retirement and remove the fear you might have.

Okay, when it comes to investing your money, forget about funds for a minute, I want you think about periods of time, and how long you want monies set aside for, and that’s what the BS does.

You split your fund into three different funds, which we advisers, call buckets, and the amount in each bucket is based on when you need money.

Let me show you what this looks like and, in my example, I’m going to use (a) retirement age of 65 but just know the BS applies at any age you decide to retire at (b) annual spending requirements of €30,000 and (c) a pension fund value of €500,000.

Bucket Number 1 - Your Short-Term Bucket

Fund Type: Cash

Risk: Zero

Cover income: From 65 to 68

This first bucket contains 3 years’ worth of annual expenses.

These could be your most active years in retirement, and you may end up spending more on holidays, hobbies, your grandchildren etc. so it might be prudent to build in a buffer to cover those extra expenses, so let’s assume you’ll need €35,000.

So, Bucket Number 1 you’re going, to have €105,000 in it.

Bucket Number 2 - Your Medium-Term Bucket

Fund Type: Bonds/Fixed Income

Risk: Low

Cover income: From 69 to 79

This is your middle retirement age and outgoings should reduce because you are dialling back on the extra-curricular activities and travel. You might be in receipt of extra income i.e., state contributory pension, meaning your outgoings and income have narrowed or increased. So, let’s assume you need €25,000 each year during this time period from your pension fund.

This bucket is invested in fixed income earning assets like bonds which are low risk funds and will do better than what you’re earning in the cash bucket which is nothing. And depending on the type of fund and bonds you invest in you can typically earn somewhere between 3% and 5% each year.

So, you’re going to deposit €250,000 into Bucket 2 and now you have 10 years of income accounted for.

You can make it more than 10 years if you wanted to by the way, whatever works best and feels right for you. And the same goes for Bucket 1, you can choose 1 year or 2 or even 5, it’s up to you.

In this instance, you have enough money in Buckets 1 and 2, that will last for 13 years, and it doesn’t matter what happens to market’s in the interim, because your income for these years is protected against any fluctuations.

Bucket Number 3 - Your Long-Term Bucket

Fund Type: Equities

Risk: Medium/High

Cover income: From 80 +

This bucket is for your later retirement years.

And because you didn’t need access to any of it for the past 13 or 14 year’s you’ve allowed it to be invested in funds that aren’t as risk adverse as cash or bonds, which means this portion of your fund should have grown much more in value than the other two.

Your starting point with this bucket was €145,000.

Remember Bucket 1 had €105,000, Bucket 2 had €250,000 and the remainder went into Bucket 3 i.e., €145,000.

If this was invested in a fund that carried a risk rating 4, it should have increased in value by about 5% per annum, meaning the future value of the amount in this bucket in 13 years’ time, factoring in inflation at 1%, is €240,243.

When you reach 80, you can then take 5 years’ worth of expenses out of that i.e., €125,00 and put it into Buckets 1 & 2 and that brings you to 85, leaving the balance in Bucket 3 to be invested and the cycle continues.

I like the bucket strategy first and foremost because of its’ simplicity and the certainty and peace of mind it brings. You’ve got to plan that your pension fund will cover, or at least contribute to, covering your expenses for three decades or more, so you need to have a plan in place, and this is a great one.

I think dividing up your savings into smaller portfolios or buckets, each with specific, dedicated time- based expenses, will help you manage them better than just one big account or fund.

What I also really like about the BS is how it protects you from market crashes like we experienced in 2008/09 and more recently when C19 took hold and sent markets tumbling in March last year.

If you had this structure in 2008 when equity markets went into freefall and reduced by 35%, instead of waking up in a cold sweat and being horrified at what’s happened to your pension fund, you go back to sleep. Why?

Because you know you have 14 or 15 years of expenses locked away in cash and bonds, that are actually going up in value. You have given yourself time to wait it out and let Bucket 3, which is invested in equities recover and capture the gains that follow, and that’s exactly what happened.

The BS strategy is great because, if we go back to the very beginning, it protects you from LIOM. And if you want a stress-free retirement and you want to keep things simple, the BS strategy is for you.

Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at or

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