How to Build a Three Bucket Retirement Portfolio | The Limitless Retirement Podcast

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Have ever wondered why some retirees enjoy financial peace of mind while others are constantly worrying about running out of money? The difference often isn’t how much they’ve saved, it’s how they’ve structured their retirement income plan. Today, I’m going to reveal the three bucket retirement income strategy that can transform your retirement experience, giving you both stability and growth potential.

without the stress of market volatility affecting your daily life. In this video, I’ll walk through exactly how the three-bucket strategy works and why it’s more effective than traditional withdrawal methods and how you can implement this regardless of your current retirement savings. I’ve helped hundreds of clients implement this approach, and I’ve seen firsthand how it creates both financial security

and peace of mind during retirement. My name is Danny Gudorf and I’m a financial planner and owner of Gudorf Financial Group, where we help individuals and families just like you create sustainable retirement income plans. Before we dive into the three bucket strategy, let’s talk a little bit about why traditional retirement income approaches often fall short. Many retirees make the critical mistake of treating

their retirement portfolio as it’s one big pool of money. They calculate a safe withdrawal rate, maybe 4 % annually, and hope their money lasts longer than they do. But this approach has a major flaw. It exposes your entire retirement income to market volatility. When the market drops significantly, as it inevitably will several times during your retirement, you’ll be forced to sell

your stock investments at depressed prices to generate income. This creates what financial planners call sequence of returns risk, which can permanently damage your portfolio’s ability to recover and sustain you throughout retirement. This is exactly why the three bucket strategy has become increasingly popular among retirement planners and retirees who want to enjoy and control more of their retirement income.

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The three-bucket strategy is a visual and practical approach to organizing your retirement assets based on when you’ll need them. Instead of treating all of your money as one pool, you divide your retirement savings into three distinct buckets, each with a specific purpose, time horizon, and investment approach. Think of it this way. Bucket one is your short-term money.

Bucket 2 is your midterm money and Bucket 3 is your long-term money. Each bucket serves a different purpose in your retirement income plan and together they create a comprehensive strategy that balances immediate income needs with the long-term growth that you need. Let’s start with Bucket 1, which contains your short-term money. This bucket is designed to cover your immediate living expenses

for approximately the first one to two years of retirement. Because you’ll need this money soon, it should be kept in highly liquid, very low risk investments. What exactly goes into bucket one? Well, if we look at the chart here, we can see in bucket one is where we want to keep our cash investments. These are going to be cash investments in your bank account, your checking account, any money market accounts or CD accounts. This is what we want to hold in that bucket one.

But the key characteristic of assets in this bucket is that they’re readily available without any risk of market volatility. I recommend having at least one to two years of spending needs in this bucket one, though some clients prefer to extend this to three years for additional peace of mind. For example, if we needed to take out roughly $50,000 annually out of our investment account to cover your expenses,

in retirement, you’d want to have at least $50,000 to $100,000 in this bucket number one. The purpose of this bucket is simple but crucial. It provides stability and predictability for your immediate income needs. When the market inevitably experiences that downturn, you won’t be forced to sell your stock investments at a loss because you’ll have the cash reserves to draw from.

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This creates a psychological benefit that cannot be overstated. Knowing that your next two years of expenses are secure regardless of market conditions provides a tremendous peace of mind. All right, moving on to bucket two, which contains your midterm money. This bucket is designed to cover your living expenses for four to six years in retirement. Because you won’t need this money immediately,

But we’ll need it before those long-term investments have time to weather any market cycles. This bucket should be invested in moderately conservative assets. What does that mean? And what goes into Bucket Tool? This typically includes your bond investment. So if we look at bucket number two here, we can have corporate bonds in there, treasury bonds. We can even put CDs or municipal bonds in there.

But this is going to be your bond bucket. These investments offer higher returns than your cash while still providing reasonable stability. I recommend having at least three to six years of living expenses in this bucket. If we use our previous example of $50,000 in annual expenses, you would want to have anywhere from $150,000 to $250,000 in bucket number two. The purpose of this bucket

is to provide a bridge between your immediate cash needs and your long-term growth investments. It will generate more income than Bucket 1 while still offering the protection against severe market downturns. When you deplete Bucket 1, you’ll begin drawing from Bucket 2 in the event that markets are down, giving your long-term investments in Bucket 3 more time to recover.

from any market corrections. So if we look here in our office, we consider bucket one and bucket two, this cash and bonds, we consider that to be your war chest. That is what’s going to get you through any market downturns. Most market downturns don’t last longer than five years. And that’s kind of why we’ve set it up this way, is to be able to weather any major market downturns. Finally, we have bucket three.

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which contains your long-term growth money. This bucket is designed to fund your retirement beyond those first six to eight years and potentially leave a legacy for your heirs. Because you won’t need this money for at least six to eight years, it can be invested more aggressively for growth. What goes into bucket number three? Typically in bucket number three, we’re gonna put our individual stocks, any stock ETFs, any stock mutual funds,

and any stock REITs. These are going to be your growth investments. While these investments experience more volatility in the short term, they historically provide the highest returns over longer periods of time. The remainder of your retirement portfolio beyond what’s allocated to bucket one and bucket two goes in this bucket three. So if we’re using our same example, let’s say we had a million dollar retirement portfolio.

and we’ve allocated $100,000 to bucket one and $200,000 to bucket two, you would have about $700,000 in bucket three. So as we can see, this is your typical 70 % stocks, 30 % bonds in cash, which may be a little more aggressive than your typical cookie cutter 60-40 portfolio. But the purpose of this bucket is to provide growth

that outpaces inflation over the long term. This is critical because retirement can last 30 plus years and inflation will significantly erode your purchasing power over that time. By keeping your long term money invested for growth, you’re protecting against inflation and increasing the likelihood that your money will last throughout your retirement. Now that we understand the three buckets,

Let’s talk how they work together in a cohesive retirement income strategy. When you first retire, you’ll draw your income primarily from Bucket 1. As this bucket depletes over the first 1-2 years, you’ll begin replenishing it by strategically selling assets from Bucket 2. Meanwhile, Bucket 3 continues to grow untouched. The beauty of this approach is that it creates a conveyor belt of money

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moving from your long-term to mid-term to short-term assets as needed. During strong market periods, you might choose to replenish Bucket 1 directly from Bucket 3, selling those stocks to capture those gains. During market downturns, though, you can rely on Bucket 2, giving your equity investments in Bucket 3 enough time to recover. This strategy provides significant protection

against sequence of returns risk. If the market crashes shortly after you retire, as it did for many people in 2008 or 2020, you won’t be forced to sell your stocks at depressed prices because you’ll have anywhere from five to eight years of living expenses covered in buckets one and bucket two. This will allow your bucket three stock investments time to recover

before you need to tap into them. This is a major and crucial point to remember. Also, beyond the financial advantages, the three-bucket strategy offers tremendous psychological benefits. Retirement can be emotionally challenging as you transition from saving and accumulating wealth to now spending it in retirement.

Many retirees struggle with anxiety about market volatility and the fear of running out of money. The three bucket strategy addresses these concerns by creating clear separation between your immediate income needs and the long-term growth that you need. When the market drops 20 % and it will at some point during your retirement, you can remain calm knowing that your next several years of expenses are secured

and bucket one and bucket two. This emotional stability is invaluable during retirement, giving us the insight to make the clear and right choices that we need to make. I’ve seen clients who’ve previously checked their portfolios daily and stressed over every single market movement become much more relaxed once they know and have implemented the three bucket strategy. They understand

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that market volatility only affects a certain portion of their portfolio, and that they won’t need to touch their stock portion for many years. When implementing the three-bucket strategy, it’s important to consider which types of accounts, taxable, tax-affirred, and tax-free should you hold which assets. This concept is called asset location and can significantly impact

your tax efficiency. Ideally, in this bucket number three here, which we hold all of our stock investments, our long-term growth investments, we want to be primarily invested in Roth accounts or taxable brokerage account. Why is this? Well, because stocks tend to generate more growth and you want that growth to either be tax free or be taxed at those preferential capital gain tax rates. Your bucket two investments are often best held

and traditional IRAs or 401Ks because bond interest is taxed as ordinary income regardless of which account holds it. So it makes sense to keep these investments in those tax-deferred accounts where they can grow without any annual tax consequences. Bucket 1’s cash holdings can be kept in bank accounts or potentially in tax-deferred accounts if you’re planning to use those funds first through required minimum distributions

or other strategic withdrawals. Of course, most people don’t have perfectly balanced accounts across all three types, so you’ll need to work with what you have. The key, though, is to be strategic about which investments you hold and which accounts to maximize your tax efficiency in retirement. The three-bucket strategy isn’t a set it and forget it approach. You’ll need to monitor your buckets and rebalance periodically

to ensure they remain aligned with your needs. I recommend reviewing your quarterly and making adjustments at least annually. During this review, you’ll want to review the following. Number one, ensure bucket one has sufficient funds for the next two to three years of spending needs. Number two, check that bucket two remains properly invested for your midterm needs. Step three.

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evaluate the performance of Bucket 3 and rebalance it if it’s experiencing gains. Step 4. Consider whether market conditions warrant transferring money between the different buckets. This regular maintenance keeps your retirement income plan on track and allows you to adapt to changing market conditions

and your own personal circumstances. The three bucket retirement income strategy offers a powerful framework for creating sustainable retirement income while managing both the financial and emotional risk that exist. By segmenting your portfolio based on time horizon, you create a system that provides immediate income security while allowing for long-term growth. If you’re approaching retirement or already retired, I encourage you

to consider how this strategy might work for your specific situation. And if you need more help looking at this, at our firm, we offer a free retirement assessment where we go through in large detail about calculating each client’s specific three-bucket strategy and how it all ties in to the retirement plan. And if this is something you’re interested in, click the link below to schedule your free retirement assessment.

Now that you understand how the three bucket strategy creates a solid foundation for your retirement income plan, I want to introduce you to how we take this approach to the next level. In addition to using the three bucket approach, we pair it with our retirement income guardrail strategy, which gives you real time insight on when you need to make adjustments to your overall portfolio spending. Think about it this way, the three bucket strategy

organizes your money based upon when you need it, but how do you know if you’re withdrawing the right amount each year? What happens if the market performs exceptionally well? Should you spend more? Or if there’s a significant downturn, how do you know exactly when and how to adjust your spending? By establishing upper and lower guardrails for your portfolio.

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The guardrail system creates a responsive system that tells you when it’s safe to increase your spending and when it’s prudent to cut back temporarily. This prevents both running out of money too early and equally important being too conservative and missing out on all those important experiences that you could have enjoyed in retirement. In our next video, I’ll dive deeper into exactly how these retirement income guardrails work

how to set your personal guardrail thresholds, and how this approach can transform your retirement income from a time of financial anxiety to one of confidence and security. Click the link right here to watch our retirement income guardrails video.