Buckets vs Blended Approach: Creating a Retirement Withdrawal Plan

Overview

Retirement withdrawal planning answers two linked questions: how much can you safely spend each year, and where should you keep the money so it’s there when you need it? Two widely used frameworks are the buckets approach and the blended approach. Both aim to reduce the chance of depleting assets, but they use different trade-offs between simplicity, flexibility, and behavioral protection.

I’ve used both methods with clients over 15 years. In my practice, the best outcomes come from treating these strategies as tools in a toolkit—sometimes combined—rather than rigid prescriptions.

Key differences at a glance

• Liquidity and structure: Buckets set aside defined funds for immediate needs; blended keeps liquidity across a single diversified portfolio.
• Behavioral protection: Buckets reduce the urge to sell during market drops by pre-funding near-term expenses. Blended relies on discipline and rules (e.g., glide paths, spending collars).
• Portfolio management: Buckets require periodic reallocation between buckets; blended requires rebalancing across asset classes.
• Tax management: Both require tax-aware withdrawals, but blended portfolios can allow smoother tax planning when using taxable, tax-deferred, and Roth accounts.

How the buckets approach works (practical steps)

1. Define time horizons and expected spending. Common segmentation: short-term (0–3 years), medium-term (3–10 years), long-term (10+ years).
2. Fund the short-term bucket with cash or cash equivalents (high-yield savings, short-term T-bills, money market funds). This covers living expenses, taxes, and emergency needs in early retirement.
3. Use the medium-term bucket for laddered bonds, CDs, or intermediate-term bond funds to bridge withdrawals as markets recover.
4. Assign equities and growth assets to the long-term bucket to capture compounding and inflation protection.
5. Replenish buckets: when markets recover or when long-term assets reach target, move funds down the line to refill the short-term bucket.

Typical funding math: fund 2–5 years of essential expenses in the short-term bucket, depending on risk tolerance and access to guaranteed income (pensions, Social Security). The medium bucket often covers years 3–10 with bond ladders timed to anticipated withdrawals.

Advantages: clear liquidity, emotional comfort during drawdowns, easier to explain to clients. Downsides: can be administratively heavier, may underperform a fully invested portfolio during long bull markets if too much sits in cash.

How the blended approach works (practical steps)

1. Design a single diversified portfolio that matches your risk tolerance and spending needs—example: 60/40 stocks/bonds, or a dynamic glide path that reduces equities over time.
2. Choose a withdrawal rule: fixed percentage, inflation-adjusted dollar amount, or dynamic rules tied to portfolio performance (e.g., guardrails around the 4% rule). See guidance on safe withdrawal rates and the 4% rule for context.
3. Rebalance periodically and adjust withdrawals when long-term trajectory changes (significant market gains/losses or spending shocks).

Advantages: administratively lean, typically higher long-term expected returns than a conservative bucket allocation, and easier tax coordination. Downsides: more behavioral stress in down markets and greater reliance on discipline.

Combining both approaches (blended buckets)

You don’t need to choose one exclusively. A common hybrid: keep 1–3 years of living expenses in a short-term bucket to cover immediate needs and use a blended, diversified core portfolio for the rest. This captures the behavioral cushion of buckets and the efficiency of a blended portfolio.

Taxes and withdrawal sequencing

• Order of withdrawals: taxable accounts → tax-deferred (IRAs/401(k)) → Roth is a common rule-of-thumb, but that can change if tax rates or required minimum distributions (RMDs) matter. RMDs currently begin at age 73 under SECURE 2.0 rules—confirm current IRS guidance before planning (IRS.gov).
• Roth conversions: consider partial Roth conversions in lower-income years to reduce future RMDs and taxes.
• Capital gains: selling appreciated securities in taxable accounts triggers capital gains taxes; laddering and tax-loss harvesting can help manage tax bills.

Always run tax-aware cash-flow scenarios. The Consumer Financial Protection Bureau and IRS have useful primitives for retirement income planning and distribution tax rules (cfpb.gov; irs.gov).

Managing sequence-of-returns and longevity risk

Sequence-of-returns risk—sustaining large losses early in retirement—can erode a portfolio far faster than average return assumptions imply. Buckets mitigate this by providing cash to spend while the market recovers. Blended approaches mitigate sequence risk through conservative initial withdrawal rates, dynamic spending rules, or by adding guaranteed income (annuities, pensions, Social Security).

For readers wanting detailed modeling of safe withdrawal rates and longevity effects, see FinHelp’s guides on Designing a Withdrawal Strategy to Preserve Nest Egg Longevity and How to Estimate Safe Withdrawal Rates for Your Retirement Savings.

Realistic examples (short)

• Conservative couple, age 65, $1.2M nest egg: Put 3 years of living expenses in short-term bucket (cash/T-bills), ladder $200k over 5–10 years in intermediate bonds, keep remainder invested in equities for growth. Use Social Security and part-time income to reduce withdrawal pressure.
• Aggressive single retiree who wants travel: uses a blended 70/30 portfolio and follows a 3.5–4% inflation-adjusted withdrawal rule, with annual adjustments when the portfolio drops more than 10%.

Common mistakes and how to avoid them

• Funding too little short-term liquidity: In bad markets this forces forced sales. Fund at least 2 years of essential expenses if you plan to be fully invested.
• Ignoring taxes: Plan withdrawals from taxable, tax-deferred, and Roth accounts with an eye to both tax brackets and RMD timing.
• Failing to rebalance: Both approaches need a periodic rebalancing discipline to maintain intended risk exposures.
• Treating one approach as permanent: Reassess allocations after major life or market events.

Implementation checklist

• Calculate essential living expenses and fund 2–5 years of essentials for bucket-style cushions.
• Select a blended target allocation and rebalance cadence for core assets.
• Choose a withdrawal rule (fixed %, floor-and-ceiling, or dynamic) and stress-test it with down-market scenarios.
• Coordinate Social Security timing and potential annuity purchases as part of a liability-matching strategy.
• Build a tax-aware withdrawal sequence and consider Roth conversions in lower-tax years.
• Schedule annual reviews and trigger-based reviews after >15% spending shocks or portfolio losses.

When to consult a pro

If you have multiple taxable and tax-deferred accounts, complex pension choices, expected large one-time expenses, or longevity concerns, work with a fee-only financial planner or CPA. In my experience, tailored Monte Carlo or stochastic modeling exposed hidden failure modes that simple rules missed—especially for early retirees or households with asymmetric incomes.

Resources and further reading

• FinHelp: The 4% Rule of Retirement Withdrawal
• FinHelp: Drawing an Income Plan in Retirement: Buckets, Buffers, and Withdrawals
• IRS: Required Minimum Distributions and retirement plan rules (irs.gov)
• CFPB / Consumer Financial Protection Bureau: retirement income and annuity guides (consumerfinance.gov)
• Federal Reserve: Report on Economic Well-Being of U.S. Households (2023) — context on reliance on savings.

Professional disclaimer: This article is educational and does not constitute individualized tax, legal, or investment advice. Rules and tax laws change; consult a qualified financial planner or tax professional before making decisions. In my practice I run cash-flow and tax scenarios for each client to tailor bucket sizes, withdrawal rates, and tax moves to their goals and longevity assumptions.