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MintLife Blog > Investing Advice > Put your money in “buckets”

Put your money in “buckets”

Investing Advice

A messy investment portfolio can be more than a paperwork problem. If you’re like many people, you may have multiple brokerage accounts, IRAs, CDs, and leftover 401(k)s from different employers – leaving you without a clear sense of your overall portfolio (unless you have it all consolidated in a Mint account). The real risk isn’t just being buried in statements – it’s panicking when the stock market hits a rough patch and you realize you lack a significant cash cushion. You may be forced to sell out of fear, which could lead you to realize losses or trigger negative tax consequences. Bucket theory is a strategy designed to prevent that scenario.

What’s “bucketing”

The basic tenet is that you first fund a cash reserves account that will take care of immediate income needs. (Near-term needs over the next five years such as a new home, car, or college tuition, should also be set aside). After that, you build other buckets with investments that are increasingly more volatile and which you won’t have to tap for several years. This allows those more volatile (and faster growing) investments time to recover if the market takes a spill. Periodically, you may rebalance some of the later-year buckets to replenish your cash reserves.

The number of buckets to use depends on your investment strategy and whether you’re planning on your own or with the help of an advisor. It can be solely for an investment portfolio, or for long-term goals that you want to build a wall around and make sure you fully fund. But, most people can get by with two or three buckets. Here’s how you design a portfolio for investors in different stages of life.


Buckets make the most sense for retirees because of their need for predictable income. In a simple version of this strategy, you’d use two buckets: one for your daily expenses – which could be two to eight years depending on where you are in retirement – and one made up of an investment portfolio for long-term growth. (Any cash you need for major purchases within five years you could keep outside of that).

In a slightly more involved bucket strategy, after setting aside cash to fund major purchases over five years, the first bucket would hold enough cash to cover two years of expenses. The first year could be highly liquid, such as in a bank account or money market fund. The second-year could be very short-term bonds or CDs of different maturities, or a “ladder”.

A second bucket could hold short- to intermediate-term bonds and funds. Say, one-third of it could be a short-term bond ladder (1- to 3-year maturities). This could double as a backup emergency fund and generate cash which can be used if the market swoons. Another third could be made of a managed bond fund which could adjust to rising interest rates or changes in the bond market – a mix of corporate or municipal bonds may also work. And a remaining third could be in Treasury Inflation-Protected Securities, or TIPS, which are Treasury bonds indexed to inflation.

The third bucket could hold stock funds and certain alternative investments, real estate, and a stake in gold and other commodities.

Pre-retirees and Mid-career workers

In the five years or so before retirement, or before you start taking required minimum distributions from a retirement account, it is important to set up and fund your buckets as you’ll soon be transitioning from accumulating money to withdrawing it.

If one goal is buying a house or car, that could be its own bucket if you choose and you can assign a online savings account specifically for that and schedule regular deposits to it. Investors often focus on their 401(k)s and IRAs, and may forget to sufficiently fund their emergency cash reserves and also a taxable investment account, which can serve as a second emergency fund. Having a taxable account as well as traditional and Roth IRAs and 401(k)s will give you different “tax buckets” that will allow you to keep your taxable income down during your retirement, says Susan Brown, a certified financial planner in Walpole, MA.


Recent college graduates often have too little in their cash reserves, particularly given the uncertain job market and the amount of debt grads often carry. In the event of layoffs, they are often forced to take drastic measures: cashing out a 401(k), which has two massive drawbacks: triggering an early withdrawal penalty and setting themselves back in saving for retirement. Setting up an emergency cash bucket of at least three to six months can prevent that.

Walt Mozdzer, a certified financial planner in West Des Moines, IA, says that bucketing can help young people educate themselves on the three main investment buckets available to them: pretax retirement accounts (traditional 401(k)s/IRAs), taxable accounts, and Roth 401(k)/IRAs.

DIY bucketing

If you want to try your hand at designing a bucket strategy, check out bucketing pioneer Ray Lucia’s website and book, Buckets of Money and this video featuring noted wealth manager Harold Evensky.

Michael Allegro is a New York-based personal finance writer who specializes in consumer interest, investing, banking products, and travel.




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